DB Plan termination but with a difficult participant....

[mphs77]

A DB Plan is attempting to terminate but one of the participants refuses to elect to receive their distribution. They believe they have been "short changed" by the Plan and is threatening legal action.

what can the Plan do if she won't elect to take a distribution? Can the trustee rollover her benefit (well over $5,000) into an IRA for the participant without her election, or purchase a deferred annuity for her?

Thanks for any guidance you can give.

[Lou S.]

You can purchase a deferred annuity (likely at a premium) provided it retains the distribution options available under the plan. Good luck.

[My 2 cents]

My view: Purchasing an annuity (as noted above, it must retain the distribution options and factors available under the plan) is the only option, unless she elects to be paid the lump sum equivalent of the benefit as defined by the plan (with spousal consent if the participant is married). Rollovers to IRAs without proper consent are impermissible if the benefit is worth more than $5,000. The annuity will cost more, but under no circumstances would she be entitled to the higher amount it would cost to purchase the annuity. The plan must define the benefit and also the lump sum equivalent thereof. Buy an irrevocable annuity to cover the benefit if the participant will not elect to receive the lump sum equivalent as defined by the plan. No election = default action. The participant has no authority to delay the distribution of benefits to complete the termination.

If she is being offered an immediate lump sum, she should have the option to receive an immediate annuity, but if she will make no election and has not reached normal retirement age, it is a deferred annuity that should be purchased.

As for the legal action, it is a free country, and you can't stop people from wasting their money on pointless lawsuits. In saying that, I am presuming that you have double checked the benefit calculations for that participant and are prepared to defend them in court.

[david rigby]

There have been a few prior similar discussion threads. Here's one:
http://benefitslink.com/boards/index.php?/topic/56082-terminated-plan-last-participant-not-responding/#.VGteOE10yUk

[mbozek]

there are 2 options:

1. Treat the participants statement of being shortchanged as a claim for benefits and initiate the procedure for deciding claims for benefits under the plan. Participant would be invited to submit evidence that benefit is incorrect and plan administrator would render decision of what benefit is. Participant could appeal. After appeals end participants only recourse is to sue plan. Downside it that it would take a year to complete claim review. Benefit is it could convince participant to take the distribution so plan can be terminated.

2. Make an offer the participant cant refuse. Its ugly but effective if the plan wants to terminate by year end to avoid additional costs.

I don't see the annuity purchase as a viable option because of the cost of purchasing such a product.

[My 2 cents]

there are 2 options:

1. Treat the participants statement of being shortchanged as a claim for benefits and initiate the procedure for deciding claims for benefits under the plan. Participant would be invited to submit evidence that benefit is incorrect and plan administrator would render decision of what benefit is. Participant could appeal. After appeals end participants only recourse is to sue plan. Downside it that it would take a year to complete claim review. Benefit is it could convince participant to take the distribution so plan can be terminated.

2. Make an offer the participant cant refuse. Its ugly but effective if the plan wants to terminate by year end to avoid additional costs.

I don't see the annuity purchase as a viable option because of the cost of purchasing such a product.

Concerning the final comment in the above post: It is noted in the original post that the benefit is worth more than $5,000. Consequently, the participant has the absolute right to demand that an annuity be purchased, and the sponsor, to complete a standard termination, has no alternative but to comply if the participant does not want to waive the right to have an annuity purchased instead of being paid a lump sum, without regard to any potential extra cost. Threats or attempts at coercion to persuade the participant to not choose an annuity must be avoided (as must any reprisals, especially if the participant is any employee, such as termination or even substandard performance ratings or pay increases), since any such pressure would create a situation where the participant would surely win any resulting litigation (interference with ERISA rights).

Ask any government official dealing with pension plans, and you will basically be told that when it comes to properly completing a standard plan termination, money is no object. The annuity provider cannot be selected based on price, participants have rights that must be protected, etc.

[jpod]

I am giving mbozek the benefit of the doubt so I don't think he was suggesting any kind of threat. I think he probably was suggesting that they offer the participant some $$ or other benefit OUTSIDE OF THE PLAN in exchange for his agreement to sign off on a lump sum distribution for the amount which the actuary has determined is his entitlement. I am not aware of any reason why that would be problematic.

[My 2 cents]

I am giving mbozek the benefit of the doubt so I don't think he was suggesting any kind of threat. I think he probably was suggesting that they offer the participant some $$ or other benefit OUTSIDE OF THE PLAN in exchange for his agreement to sign off on a lump sum distribution for the amount which the actuary has determined is his entitlement. I am not aware of any reason why that would be problematic.

It was certainly not my intention to imply that mbozek was suggesting any kind of threat. I was just taken aback by the idea that an annuity purchase would not be an option because of its cost. Annuity purchases are the default option when a defined benefit plan terminates (however likely it may be that individual participants will opt for a lump sum and not have an annuity purchased)..

Going back to the idea that the participant is threatening to derail the plan termination because they don't think their benefit is as large as it should be, I am not sure that offering a cash incentive or something else outside the plan to accept the plan benefit as is and to elect to receive it as a lump sum will work. I may be wrong, but such an offer seems to me likely to make them even more suspicious. Why can't the sponsor just say "Here is a statement showing what you are entitled to and an election form. Make an election by [date] or an irrevocable annuity will be purchased on your behalf." and then do it. Assuming that the benefits have been double checked and the plan administrator is confident that they are correct.

I presume that the participant was given a Notice of Plan Benefits months ago and the notice said what to do if the participant felt that the information shown was not correct. Wouldn't that represent a benefit determination, so that the time for appealing would have run from then? If the notice was given out in 2013 (using 2013 417(e) rates) and said that changes in those rates could increase or decrease the lump sum payable, but the actual 417(e) rates are to be based on levels in 2014 (reducing the lump sum), that should be clearly communicated to the objecting participant with a statement that the amount quoted in 2013 is not protected in any way. Assuming no plan provisions to the contrary.

[david rigby]

Yes, yes, yes. I agree with My2Cents advice, which can be boiled down to "follow the plan".

However, mbozek makes a very good point about whether the participant's question is an appeal of a benefit determination. Of course, that also gets you back to "follow the plan".

Avoid any type of incentive outside the plan.

[mbozek]

My comment about the annuity purchase not being a viable option was based on the comments in the link of the difficulty of purchasing an annuity for one participant from an insurance company which includes all of the plan provisions for payment options. I ran into this problem back in the day when a participant retired under a money purchase plan and had to be offered a life annuity.

As to settling the participants claim of being short changed on benefits plans can always elect to settle a dispute over the value of amount of the pension under the terms of the plan by negotiating a settlement as alternative to litigation. Resolving the dispute by a settlement to save the plan litigation expenses is a prudent use of plan assets. A settlement can also be made by the employer to pay the employee X dollars in return for a release of all claims the employee may have under applicable laws. For example an employee can waive all rights to potential claims under age federal age discrimination law as well as ERISA and other laws against discrimination if the employer pays the employee an additional amount that the employee is not otherwise entitled to. Employee is free to accept the payment or file a claim for additional benefits.

[My 2 cents]

Any extracontractual offer to the participant should clearly state something to the effect that the offer is not some sort of admission of guilt.

Any extra money to be paid under such an offer would presumably be taxed as ordinary income and would not be eligible for rollover, right?

[mbozek]

the agreement will recite that the participant is releasing the employer from liability under all laws listed in the agreement in return for a payment of X dollars. Any additional language is specific to the industry or regulatory environment.

Payment would be subject to income tax.