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Notice of Annuity Information


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Doing a DB plan termination. Of the 40 participants with a lump sum greater than $5000, two selected an annuity. We had everything set for June 1 lump sum distributions but the plan sponsor is only now dealing with the annuity purchase. Am I correct that because the Notice of Annuity Information is just now going to be provided they cannot pay the lump sums until the 45 day advance notice requirement is met?

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No, they can pay the lump sums, but they can't purchase the annuity until 45 days after the participants are notified. 

if you are allocating excess assets, I suggest you wait until you purchase the annuity before paying lump sums.  You won't know what your excess is until the annuity is purchased.

  

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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That is what I thought initially, but after reviewing 4041.27 it reads like all participants with a lump sum greater than $5,000 need the Notice of Annuity Information at least 45 days before distribution date. I have some 2013 ACOPA webinar slides - PBGC Standard Termination and Coverage - which seems to support that. 

 

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A little late for this client, but Kurt Piper and I have recommended in our presentations on PBGC terminations that the standard language of the NOIT be expanded to provide a Notice of Annuity Information. 

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Picking up on what Effen mentioned about excess assets.  Do you just allocate excess assets to those receiving lump sums?  Shouldn't the participant electing an annuity share in the excess too?  That causes the problem of endless iterations because you don't know how much excess there is until you price out the annuity but you don't know how large the annuity should be until you allocate the excess.  We're trying to wind up a cash balance termination with excess assets, and we've suggested some options to the plan sponsor. (1) Reserve a portion of the excess, allocate the balance of the excess to everyone, and if there's anything left from the reserve after the purchase of any annuities transfer it to the 401(k) plan. (2) Initially provide election forms including an allocation of the excess to the non-partners (the plan sponsor is a law firm); after any annuity contracts are priced out, allocate the remaining excess to the partners.  This assumes all partners will elect lump sums.

Is there any other way to deal with the excess?

Thanks.

 

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I definitely agree with Mike that the NOIT should have contained the language to begin with, but since it didn't, and some elected a lump sum, you can argue they don't need to know.   I suppose someone could argue that they might have selected an annuity if they knew who you were buying it from, but that is probably a stretch.  Unless you are going to give them the option of revising their election, not sure what the purpose would be served by waiting the 45 days to pay them, but waiting would be the conservative answer.

Regarding Cathyw - the allocation of the excess assets just needs to be non-discriminatory.  You don't have to give it to everyone, you just can't discriminate in favor of HCEs.  There are an infinite number of acceptable solutions.  Assuming the two you mentioned would not be discriminatory, they both seem viable. 

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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As the annuity benefit is protected and known, but the "excess" is just that, any reason participants electing an annuity could not be paid their share of the post purchase excess in cash?

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