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Guest RARogers

Elective Transfers from Terminated Plan

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Guest RARogers

2 questions:

1. When you terminate a db plan and want the money to go to dc plan sponsored by the same employer, can you do it in an elective transfer under Reg. ss 1.411(d)(4) without offering a lump sum option? That reg. says that to have an elective transfer you have to give the pt. the right to take an immediate distribution (in addition to a deferred annuity or the elective transfer), but I've interpreted that (based on some old informal IRS input) to mean that you had to give the pt. the right to choose immediate commencement of annuity payments, and that it did not mean that you had to give the pt. an immediate lump sum option. I've gotten IRS determination letters on this. Is there anything (or anyone) out there that comes to a different conclusion?

2. In the same vein, we've not given pts. whose benefit does not exceed the mandatory cashout limit the right to make an election -the money was simply transferred to the new plan. The PBGC has questioned this. Any thoughts?

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Oversimplified, if a DB plan is terminated, the plan must provide the accrued benefit in some form, such as the purchase of a paid up annuity or a lump sum. Receipt of a lump sum, if over $3500 (now $5000), requires approval of the EE (and spouse). Once the lump sum is properly chosen, then the participant has the right to do a "direct rollover" to any qualified plan in which he is a participant (and assuming that plan will accept a rollover) or to his own IRA.

Note that a rollover to the spouse's plan, or to the spouse's IRA is not permitted. I think that rollover to any 403(B) plan is not permitted but not sure if that has been changed. Help anyone?

If the sponsoring ER is replacing the DB plan with a DC plan, then the DC plan can be an available option to accept such rollover, but it is still the EE's choice. The ER, or the mechanics of the plan termination, canNOT require the participant to do any particular action, except when the lump sum is below the mandatory cashout limit of the plan.

It is my understanding that your Q2 would be a violation of the rules as summarized above. Do you have legal review of this?

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Guest RARogers

pax - What we plan to do is to terminate without a lump sum option - the options would be immediate payment under in the form of an annuity (that is a life annuity that begins asap), a deferred annuity (a life annuity that begins when the participant retires or would have otherwise been due payment under the plan), or a plan to plan transfer under Reg. ss 1.411(d)-4 (not a direct rollover). What do you think of that? It should work.

On q. 2 - the idea behind the mandatory plan to plan transfer where the benefit does not exceed the mandatory cashout limit is that the pt. isn't required to consent (and neither is the spouse) to a mandatory cashout, and the transfer is the equivalent of a mandatory cashout (admittedly somewhat lame).

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One question surrounding your scenario: did your plan provide for lump sum distributions as an option prior to termination, and if yes, what were the restrictions on receipt?

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Guest RARogers

I don't think it makes a difference whether lump sums were offered - because if they were, they were only available if you terminated employment.

In my scenario, the pt. hasn't terminated employment, payment is being made on account of plan termination, and there would be 2 new payment options(not available before the termination and an amendment that would be made in connection with the termination): 1. payment on plan termination in the form of an immediate annuity, and 2. the plan to plan transfer.

Note also some postings by David Shipp in the Retirement Plan Termination topic that refer to some Enrolled Actuary meetings.

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I went to the Retirement Plan Terminations site and read David Shipp's postings on this subject. Note that the Gray Book question specifically sited a defined benefit pension plan that did not provide for a lump sum option prior to termination. If your plan did provide for immediate lump sums prior to termination of the plan, I'm afraid that the Gray Book response is not of much help. My feeling if this is the case is that participants must be provided with a lump sum option at termination of the plan with the ultimate destination at their discretion. So I guess the question still stands, did your plan previously provide for lump sums prior to retirement at termination of employment?

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Guest RARogers

myatt - thanks for your response.

One of the plans is a dc plan, so it definitely has a lump sum option.

BUT - the lump sum option is payable on termination of employment, and we can replicate that with a deferred annuity, if the pt. elects it. So by not offering a lump sum option on termination of the plan, we are not denying the pt. any accrued benefit right. An optional form of payment is defined not only by how it is paid, but by when it is paid. For example, a right to be paid your entire benefit at age 55 (before termination of employment) would be a separate option from a right to be paid your entire benefit at termination of employment. If the plan didn't have an age 55 right of withdrawal, I could add a right of withdrawal restricted to installment payments, even though a lump sum option was available at termination of employment.

The important thing, I think, is that the plan not have a lump sum option payable "on plan termination." In my situation there is no such option, so I don't have to give it when the plan terminates.

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Since it's Friday, I can't think straight; need to think about that some, although it does not seem correct.

But, it is my experience that you cannot buy a deferred annuity for small amounts. That is, no insurance co. wants to deal with that. Is that a correct impression? If not, under what conditions would it happen? Would the ins. co. do so only if there are $X dollars (total) involved, for example?

If you cannot buy a deferred annuity, then the only alternative is an immediate annuity, possibly in J&S form. That can easily make your monthly benefit very small. If that is the case, it may be one more incentive to the participant to elect a single payment (either lump sum or direct rollover). If I were offered:

1. lump sum of $10,000, (assume the deferred annuity of $300 per month starting in 30 years is unavailable on the open market), or

2. an immediate annuity of $20 per month,

I probably would not have any interest in alternative 2.

[This message has been edited by pax (edited 01-15-99).]

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