Options Available to Actives

[ndj2377]

DB plan is terminating and it seems there may be some differing opinions on how to treat active participants.

- Actives cannot receive benefits until they terminate employment

- Early retirement subsidies starting at age 55 and 5 years of vesting (all have 5 years of vesting)

- As part of the Plan Termination, lump sums will be offered

- The plan was not amended to offer in-service distributions

Question #1

Do active participants that have met the age and service requirements for retirement (55 & 5) receive only the QJSA and QOSA Immediate Annuity options or do they get treated the same as Vested Terminated Participants and have the full allotment of annuity options as if they terminated employment and are retiring?

Question #2

If the answer to the first question is "NO", do the Actives that meet the age and service eligibility requirements get the subsidized QJSA and QOSA options or are the subsidies only available for those that "retire"?

 

[My 2 cents]

The following would be my understanding when a DB plan terminates:

1.  ALL actives must be given the opportunity to have a deferred benefit purchased.  Nearly all plan terminations I have ever seen offer an immediate lump sum.  If an immediate lump sum is offered, irrespective of the plan's early retirement age and service requirements, an immediate QJSA MUST be offered.  Essentially, all restrictions against in-service distributions are off when the plan is being terminated.

2.  It is possible that subsidized early retirement benefits do not need to be provided with respect to immediate annuities for people who don't already meet the age/service requirements, but any deferred annuities for actives remaining in service MUST allow the active to grow into the subsidy if they remain in employment.  For example, if there is an unreduced benefit for anyone retiring with 25 years of service, if someone is active with 8 years of service, the deferred annuity must provide that if that person remains in active employment for another 17 years, then the person must be eligible at that time for an unreduced benefit based on the 8 years of service.

[ndj2377]

8 minutes ago, My 2 cents said:

The following would be my understanding when a DB plan terminates:

1.  ALL actives must be given the opportunity to have a deferred benefit purchased.  Nearly all plan terminations I have ever seen offer an immediate lump sum.  If an immediate lump sum is offered, irrespective of the plan's early retirement age and service requirements, an immediate QJSA MUST be offered.  Essentially, all restrictions against in-service distributions are off when the plan is being terminated.

2.  It is possible that subsidized early retirement benefits do not need to be provided with respect to immediate annuities for people who don't already meet the age/service requirements, but any deferred annuities for actives remaining in service MUST allow the active to grow into the subsidy if they remain in employment.  For example, if there is an unreduced benefit for anyone retiring with 25 years of service, if someone is active with 8 years of service, the deferred annuity must provide that if that person remains in active employment for another 17 years, then the person must be eligible at that time for an unreduced benefit based on the 8 years of service.

Thanks for the reply. A quick follow-up -

For actives that do meet the age/service requirements -- they will have the immediate annuity options (QJSA, QOSA).

 

Question -- Should they receive those immediate annuity options based on the early retirement subsidies or alternatively, should they have their immediate annuity options be an actuarial equivalent based on their lump sum?

[My 2 cents]

Under a defined benefit plan, it is my understanding that the annuity to be purchased is NEVER to be limited to cost the same as the available lump sum.  You always start with the accrued benefit, and either determine an equivalent lump sum (based, in most cases, on the 417(e) mortality and discount factors) or buy an annuity that is, per the plan's equivalence basis, actuarially equivalent to the accrued benefit.  Recently, the annuity purchase cost was almost always much higher, so the total cost of plan termination goes up to the extent that annuities are to be purchased instead of lump sum payments.

I have seen plan amendments governing the addition of an immediate lump sum that limits the benefit payable to an active to the actuarial equivalent of the accrued benefit, whether they have completed the age and service requirements for a subsidized early retirement benefit.  Want the subsidy, then terminate employment.

[Calavera]

Those who eligible to retire should receive their immediate annuity benefit based on the early retirement provisions of the plan. The lump sum amount may exclude the early retirement subsidy and be only based on the present value of the deferred annuity. The amendment to offer the lump sum should properly reflect that. Alternatively, the early retirement subsidy could be included for everybody, using a plan's early retirement reduction from NRA to ERA and an actuarial equivalent thereafter. The amendment will need to reflect it as well.

[ndj2377]

23 minutes ago, Calavera said:

Those who eligible to retire should receive their immediate annuity benefit based on the early retirement provisions of the plan. The lump sum amount may exclude the early retirement subsidy and be only based on the present value of the deferred annuity. The amendment to offer the lump sum should properly reflect that. Alternatively, the early retirement subsidy could be included for everybody, using a plan's early retirement reduction from NRA to ERA and an actuarial equivalent thereafter. The amendment will need to reflect it as well.

Could the argument be made that those participants are not eligible to retire because eligibility depends on termination of employment - which has not occurred

[david rigby]

1 hour ago, ndj2377 said:

Could the argument be made that those participants are not eligible to retire because eligibility depends on termination of employment - which has not occurred

I think it depends on the terms of the plan.  Termination of the plan is (typically) a distributable event, so separation of employment may not be required, but most plan terminations I've seen do not include any "separation of employment" clause for those still active.  If the plan purchases an annuity for an active, the annuity provisions must include all the potential early retirement options, which means the insurance company will probably ignore any separation of employment provision, and the most expensive of all E.R. permutations will determine the annuity cost.

[My 2 cents]

When a plan terminates, all benefits must be distributed either through lump sum payments (or direct rollovers to IRAs or other qualified plans) or through the purchase of immediate or deferred annuities from an insurance company.  If lump sums are to be offered, there can be no requirement that active participants separate from service, and immediate annuities must also be offered.  Whether early retirement subsidies will be factored into the immediate annuities for the actives may depend on the terms of the plan and any amendments adopted in connection with the termination, but if there are to be lump sums available to actives, immediate annuities must also be available.

[Ted Munice]

If a participant (active or terminated vested) elects a DEFERRED annuity upon plan termination, does the insurance company have to allow the participant to convert to an optional form at NRA based on the provisions of the terminating plan? That has been my understanding. If yes, has anyone had any recent experience in purchasing such an annuity - any pushback form the insurance company?

[Draper55]

I do not have recent experience as such but I think the optional forms including the definition of actuarial equivalence tag along with the accrued benefit so the insurance company will price that into to the contract.  Having worked at insurance company initially there was an assortment of  terms such margins, retention, risk stabilization, surplus, contingency  etc. to virtually "insure" a profit; I am sure  you will pay for all potential disbursements.