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The IRS recently announced a reversal of the 2015 decision that participants in pay status taking a lump-sum payment is a violation of required minimum distribution rules. With the move by the U.S. Treasury and IRS, private companies are allowed to offer lump-sum payments to retirees and beneficiaries instead of monthly payments.

"The closer you get to retirement, it might be wiser to increase the allocation to income producing investments over more volatile investments." mirror photography of trees on hill

Pension plan sponsors had been looking for opportunities to manage their growing pension liabilities, with the 2015 IRS policy shutting the door on sponsors who were considering offering pension plan retirees a lump-sum settlement option. With that policy being rescinded, sponsors of pension plans may now, once again, consider whether a retiree lump-sum window is a viable option to help manage their pension liability.

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Sponsors of pension plans sometimes use lump-sum windows as a way to “de-risk” their plans from market volatility, mortality table changes, changes in funding rules, and any number of other pension and market uncertainties. Prior to the 2015 policy, some plan sponsors would often offer defined benefit plan participants who were not yet collecting a short period of time (a “window”) a lump-sum payment of their benefit. In some cases they would also offer a “retiree lump-sum window” to retirees currently receiving lifetime annuity payments; in this case they could convert their remaining annuity payments into an immediate lump-sum.

The Treasury Department and the IRS will keep a close eye on retiree lump-sum windows, and left the door open for further guidance in the future. However it seems that plan sponsors can, once again, consider the suitability of a retiree lump-sum window without fear of action from the IRS. Just because a plan sponsor can now offer a retiree lump-sum window does not mean that all will offer that feature.


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Tags: Financial Planning, Lump Sum, Pension, Retirement Planning