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Amend Plan to Purchase Annuities?


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I have a client who is considering purchasing annuities for some of the retiree group.  Their attorney says a plan amendment is required.

 
I have never heard of a plan amendment being required in this circumstance.
 
Has anyone heard of an amendment being required in this situation
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No, I've never heard of it.  But, the plan provisions rule. 

Did the attorney identify the current restriction that must be amended?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Things to watch out for:

AFTAP must be high enough.

Don't purchase annuities for top-25 HCEs unless the plan's funding is sufficient to ensure that it will remain 110% funded AFTER the purchase.

If the plan is subject to ERISA Title IV, you will have to report the annuity purchase on the appropriate PBGC filing.

Watch out for the following year AFTAP.  It could be problematic if you take advantage of a high enough AFTAP now to get those retirees off the books at the expense of the plan falling into restriction under IRC Section 436 as a result. 

Always check with your actuary first!

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I have inherited and restated plans that specifically say that the plan can buy an annuity to fund a retiree's payout. I have thought the language unnecessary, but left it in. Maybe the attorney in question thinks, by negative inference, that plans have to have the language. Wouldn't hurt to put it in, and include that distribution of the annuity lets plan off the hook, "fully, finally, without recourse, etc."

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On 9/27/2017 at 4:27 PM, My 2 cents said:

I think we are all wondering what it could say in the plan that would make it necessary to adopt an amendment in order to buy annuities, even in a non-plan-termination scenario.

Check the trust agreement, if separate, or the trust provisions of the combined plan / trust.  The provisions should allow for the purchase of annuities.  If not, perhaps an amendment is in order; but I agree with you it is not a plan provisions per se.  

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4 minutes ago, tuni88 said:

How is it that purchasing annuities is not deemed an accounting settlement?

Settlement accounting (assuming this refers to FAS88 / ASC715), is triggered at a certain level: service cost + interest cost.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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At a prior position, we had a participant inquire about the Plan's authority to purchase annuities.  The annuities had been purchased and part of the plan pre-ERISA as a way to guarantee the benefits.  The successor Plan did amend the Plan recently to specifically allow for annuity purchases as part of a de-risking strategy.  It certainly doesn't hurt to amend the plan, and can cover you when a cranky participant requests documentation on the Plan's authority to make such purchases.

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One assumes that annuities will only be purchased to the extent consistent with the authority given to the plan administrator and trustees to do so (and, of course, there being no AFTAP-related limitations on purchases).

That said, participants don't have a say!  They don't get to demand that their benefits be purchased, they don't get to veto the purchase of an annuity.  And, to the extent that the plan or a group annuity contract is to be amended to eliminate a contractual requirement that annuities be guaranteed or purchased when participants retire, there is no possible cutback with respect to IRC Section 411 when the amendment is adopted.  The expectation that an annuity will be purchased is NOT part of the accrued benefit.

Always check with your actuary first!

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