Terminating DB Plan - lump sum window

[waid10]

We are in the midst of a standard termination. We want to offer a lump sum window to terminated vested participants. Can we offer this same lump sum window to active participants? Is that legally permissible? The more people that take lump sums, the more accurate our annuity pricing will be. Thus, we wanted to see about offering the lump sum window to actives.

Thanks for any thoughts.

[Lou S.]

Yes offering lump sums to actives on Plan Termination is legal. No problem at all.

[david rigby]

BRF?

[My 2 cents]

Has the 60 day period after you filed the PBGC Form 500 elapsed? If so, you can offer participants their choice between a lump sum and annuity purchase. If not, here are reasons why you cannot do a lump sum window for anyone:

• The plan would have to be amended to establish a lump sum window other than as part of the final distribution of plan assets. It is not permissible to adopt such an amendment after the effective date of the plan termination.
• The PBGC does not permit any accelerated distributions between the date the employer decided to terminate the plan and the date 60 days after the 500 was filed, especially if they were not being made as part of the normal administration of the plan.
• Unlike a lump sum window under an ongoing plan, the choice would have to be between an annuity purchase and a lump sum. It would make no sense to offer a lump sum window where the choice was between a lump sum and the status quo (with another choice being offered, between an annuity or a lump sum, when the termination was to be completed).
• Like all choices involving lump sums, to obtain proper spousal consent, you would have to offer an immediate QJSA. Lump sum now versus deferred QJSA is not an acceptable choice.
• If not distributing all benefits at the same time, you still need to watch out for 25-high restrictions. And watch out if paying actives before the distribution of all plan benefits - the plan's qualification could be jeopardized if you make in-service distributions ahead of finishing the termination, if for some reason the termination cannot be completed. It's happened. What if the discount rates used in insurance company purchase rates drop 150 points and everyone decides to demand an annuity purchase (which is indisputably outside the control of the sponsor), raising the additional assets needed to complete the termination by 100% or more?