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Dennis Povloski

Change Benefit Election on Plan Termination

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Plan is a traditional defined benefit plan.  Plan has 4 participants who elected annuity forms of payment, and are receiving their payments from the plan trust.  The plan is going to terminate through a standard termination with the PBGC.

Can the participants already in pay status make new elections on plan termination if they want to, for example, get a lump sum from the plan.  Let's assume that the plan will be fully funded and can pay out 100% of all benefits due.

TAG says that 401(a)(9) allows for a change of election upon plan termination, and I just wanted to double, triple, quadruple check with the community as well.


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Yes, the plan can offer a lump sum window during plan termination.

IRS Notice 2019-18 essentially allows it again.

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Yes, the sponsor will probably find that retirees lump sums are less costly than retiree annuity contracts.  However, other factors might be relevant; for example, a 2019 lump sum based on August 2018 rates might be about 2.5% greater than if the lump sum is based on November 2018 rates (ie, without regard to possible annuity purchase).  Therefore, the "savings" can vary from plan to plan, but more importantly will vary based on the plan definition and the actual retiree population.

IMHO, the sponsor might want to think long and hard, and think again, before doing a LS offer to retirees.  My experience with this is summarized as, "Retirees don't like change".  Someone will probably have to explain it when EACH retiree calls on the phone, and again when the retiree's spouse calls on the phone.  (Voice of experience.)  Don't treat this lightly.  Don't be surprised if the acceptance rate is low.

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I agree with David and add that offering a lump sum to a retiree creates a new Annuity Starting Date.  That means they should be given all plan options, not just the ability to convert their current annuity into a lump sum.  This mean fresh spousal consent and new J&S options with current spouse if remarried.  This will create adverse selection concerns as retirees adjust their new payment form to fit with their current health.

Also, insurance companies will price the annuities differently if they know lump sums have been offered and declined.  Maybe not enough to offset the savings on those who took lump sums, but it is something else to consider.

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