My 2 cents

Am I right in assuming that they become participants as of January 1, 2016? With a 1-year service requirement, doesn't the plan have to have at least semi-annual entry dates? Let's suppose that a calendar year plan has a 6-month elapsed time requirement for entry (entry date = first day of plan year) and someone was hired on June 15, 2015. That person becomes a participant on January 1, 2016 and is not in the end of 2015 count for the 2015 5500 filing (or for the 2016 PBGC premium, which is based on the last day of the prior year). Does this example help?

Back when I was younger, I thought that retirement plan participants who took lump sums should be deemed ever after to have assets at least equal to the present value of those annuity payments that would not have been payable yet, for purposes of eligibility for such things as Medicaid and other welfare programs. I recognize now that this would be too harsh in effect. But "buying a car" is not good for the economy to the extent that it is being bought with funds that will be needed later for food, clothing and shelter, especially if the general public is expected to provide those necessities. Between the fact that people are not all that good about saving/preserving saved funds for their old age and the fact that nowadays there are too many ways for the unscrupulous to separate lump sum recipients from their funds (scams, identity theft, unsuitable investment vehicles, etc.), I have enough issues dealing with the currently-employed choosing lump sums. For those long past their working days, it just seems to easy for bad decisions to be made. I can easily imagine a courtroom scene where an elderly person testifies "I never thought that if I took the lump sum offer that the monthly checks would stop." Can you?

Another thought on the subject of lump sum windows for retirees (back in the days when they were permitted): While the decision to offer such a program may be considered to be a settlor function (i.e., made by the sponsor unencumbered by fiduciary issues), it should be clear that carrying out the program if adopted, from design of communication materials to the management of elections, is unquestionably subject to fiduciary standards, and must not in any way put the sponsor's financial interests ahead of those of the participants, especially if it is not made clear what adverse effects of an affirmative election might be. We are all better off without it being in the toolkit. To Andy the Actuary: I am not going to look at the article you attached to your last comment. I am too easily outraged and it would probably not be good for my health to read it! Also, does the ability to take lump sums from defined contribution plans frustrate their purpose of allowing workers to save money for retirement? I still remember a conversation with an HR head who pointed to a car in the employee parking lot, identifying it as her distribution from the retirement plan at her former employer. Tsk, tsk!

1. Eliminating retiree buyouts altogether is, in my mind, the exact reason for the notice. Just because they let Ford do it a couple of years ago does not mean that it is something that should be permitted. As far as I am concerned, if their stated reason had been "because we said so" instead of whatever point they were making with respect to 401(a)(9), it would have been as welcome to me. I am opposed to the idea of the plan sponsor trying to save money by persuading retirees to give up their annuities. I might think differently if they were being offered lump sums based on insurance company net purchase rates instead of the rates under 417(e). 2. I don't think that it is possible to explain a lump sum buyout to a retiree population in a way that will be clearly understood by the retirees. I don't think that anyone already in pay status should be offered any choices when a defined benefit plan terminates, because of the potential for abuse. Let people not in pay status choose lump sums (whether doing so is in their best interests or not), but the sponsor should have to get out the wallet to buy annuities for those already retired. 3. Even if you do explain the offer in a way that allows the retirees to clearly understand their choices, while there may be some exceptions, how many septuagenarians and octogenarians are able to suddenly become competent investment managers? 4. If the participant had retired with spouse A, under a QJSA, then later divorced and married spouse B, how do you handle the spousal consent requirements for the election to cash the annuity out? Surely you would need the consent of spouse A (who would be losing his or her potential survivor annuity) and spouse B (since canceling the original QJSA for a new annuity start date would also require waiver of the QJSA for the current spouse), and what incentive would spouse A have to give up the survivor benefit? 5. And then there are the people unable to act on their own behalf. If a nursing home has power of attorney for a resident retiree, is it not obvious that there is a serious conflict of interest?

Isn't the disclosure just supposed to show how much is expected to be paid, with no need to "value" the benefits? I would imagine that best practice would be to calculate the cash flow using whatever decrements are relevant and with any resulting benefits being included. You calculate a cash flow when preparing the Funding Target, right? Do the same thing for the ASC-715 work. Assuming your valuation software would allow you access to the anticipated cash flow, it should not require much of any extra work to prepare that disclosure. The original post used the term "emerging liabilities", but the disclosure just asks for the anticipated cash flow (at least that is what we think is being requested).

Isn't there a greater degree of protection from creditors if the money is in a qualified plan than in an IRA?

Repairs on the George Washington Bridge?

You may want to watch out - when the letter to the IRA provider says that retaining money in the IRA that was not eligible for rollover could jeopardize the tax treatment of the IRA, they may be right. Even if the consequences would only apply to the portion that was not eligible, the investment earnings on that money are probably not eligible for any tax deferral. I am not a lawyer so don't rely on what I say, but do watch out.

I interpreted "at any time" as referring to when the in-service distributions could be made once the plan was amended, not when would it be permissible to adopt an amendment permitting in-service withdrawals. If the question is whether a plan not permitting in-service withdrawals can be amended at all to permit in-service withdrawals, I would expect the answer to be yes, so long as the effective date is satisfactory and the in-service withdrawals are only to be made when the law and regulations would allow them, provided that the timing of the amendment would not, by itself, violate 401(a)(4).

So, out of curiosity, what are the differences between a 401k rollover and a 401k transfer? Are you referring to rollovers/transfers out of 401(k) plans or into 401(k) plans? As this is a forum for exchange of information, can you help educate all of us? Even those of us who do not work on 401(k) plans may have account balances in them.

Speaking as someone who does not work on 401(k) plans: If the termination is not bona fide, then the regulators might consider it a sham transaction and thus a violation of the rules against in-service distributions. The fact that he (as participant) would be conniving with himself (as trustee) is unlikely to make it look any better to the regulators. Is he the sole trustee? In general, not a good idea to be approving his own distributions. Terminating the entire plan would probably be likely to better withstand regulatory scrutiny.

In general, I don't think so. If it is a defined benefit plan, I think it can only be amended to allow in-service distributions after attainment of age 62 (unless the plan's normal retirement date is earlier, but it must be demonstrable that an earlier NRD is justifiable within the actual industry). If it is a defined contribution plan, I think in-service distributions are subject to some restrictions. It might be necessary to be able to demonstrate hardship. I leave the details for defined contribution plans to those who work with them more than I do.

Is "savvy investors" an oxymoron?

Would failure to pay the account out (if called for by the plan) create another error subject to VCP? If the VCP (when approved) requires that the employer pay more in, would there be a problem with paying out the new piece after the existing account is paid?

If I remember the rules properly, the DC plan would be unable to recognize permitted disparity for anyone covered by a DB plan providing for permitted disparity (or vice versa?). Also, is there a 35-year limit on application of permitted disparity under DC plans, so that if someone has already had 35 years' worth of contributions based on permitted disparity, the plan has to provide that person contributions without regard to permitted disparity? Perhaps someone more involved with DC plans can give you a better answer.

Is this a defined benefit plan or a defined contribution plan? When the company went bankrupt, were no steps taken to terminate the plan? If a defined benefit plan, was it covered by the PBGC? Was the company liquidated? Who is charging penalties and who do they think will pay them? Who was nominally responsible for submitting the filings? I don't think that fines for late/missed filings would be assessed against a third party administrator, just the sponsor, the plan administrator and/or one or more trustees, if applicable. Who will absorb the administrative costs of terminating the plan? How could the bankruptcy proceedings not do something about the plan before allowing the employer to be liquidated? What is the sound of one empty hand (with no money) paying fines?

The withholding on the RMD is not required to be 20% of the distribution. That is for distributions eligible for rollover that are not rolled over (not RMDs). May be 10% as a default. The participant can submit a W-4P form to direct a specific amount for withholding. The participant should try to anticipate how much will be owed as taxes and have that amount withheld.

It is my understanding that she must pay taxes (ordinary income) on the MRD. I don't think she can put it into a standard IRA - every year, she will owe taxes on any investment income generated by those funds. What would be the advantage to trying to put the entire amount into an IRA? I don't think it is permissible. Are you asking whether you (in distributing her account) are permitted to not perform the necessary calculations to identify the portion that is the RMD and to handle it accordingly? If so, I am pretty sure the answer is that you must identify how much of the distribution is an RMD and to report it on a separate 1099-R as ordinary income (in addition to a 1099-R reporting the rest as a direct rollover to an IRA). I don't think you can then send the whole amount to an IRA for investment there. But I don't usually get involved with IRA issues, so don't take my word for it.

With respect to the orginal question, this is the essential information. However, that may overlook the larger question: is this a good thing to do? As discussed, it will lead to a funding loss, and corresponding amortization. It could also affect the audit requirement. Discuss these issues with your EA. If an ongoing plan permits lump sums at retirement, then if/when it terminates, all participants not in pay status with benefits worth more than $5,000 have the absolute right, without regard to the cost to the sponsor, to elect deferred annuities that must also permit lump sums when those people reach retirement age. It is even worse when the plan permits lump sums at any time after termination of employment. The annuities have to permit that, and boy, do insurance companies charge extra for a right like that (assuming that they are even willing to offer such annuities)! Is it not the current view that any such annuities must determine lump sum amounts based on whatever the 417(e) rates may be on the date of payment, even if years after the plan termination? That could be where "something like this could blow up".

This is from an actual situation, where the alternate payee expressed concern that the participant has not signed the order yet. It was not a "what if" hypothetical. Sorry if I gave the impression that it was.

Question 17 from the 2014 Gray Book (informal guidance from IRS personnel speaking for themselves and not for the IRS) says, first, that adding a lump sum option to a plan frozen before September 1, 2005 would not cost the plan the exemption from most of the requirements of IRC Section 436 because adding a benefit payment option would not be considered an accrual. The second point in the answer to Question 17 says that the amendment adding the lump sum option would be treated as a benefit increase due to a plan amendment under Section 436 if it increases the Funding Target. Two things to note here: 1. While most of Section 436's restrictions are not applicable with respect to a plan frozen before the magic date of September 1, 2005 (and it is noted above that the plan would not lose its exemption due to the adoption of an amendment only adding a lump sum option), a frozen plan would not be exempt from the provision in Section 436 concerning plan amendments increasing the Funding Target. So if the amendment adding the lump sum option to the plan (already only 63% funded) increased the Funding Target, you would need a special Section 436 contribution for it to become effective. 2. In assessing whether an amendment adding a lump sum option raises the Funding Target (and if so, by how much), remember that the anticipated amount of each expected lump sum (if based only on 417(e) rates) for purposes of calculating the Funding Target must be measured using unisex mortality under 417(e) and the same segment rates/yield curve as are used for purposes of Section 430 minimum funding (the IRS "substitution rule"). That is, notwithstanding the fact that a plan being funded based on HATFA rates will have to pay lump sums much larger than the participant's share of the Funding Target, the impact on the Funding Target prior to the making of actual lump sum payments will be minimal since all expected future lump sums (including those expected to be paid in the current plan year, where the actual Section 417(e) segment rates are already known) will be calculated assuming that the Section 417(e) rates are the current HATFA rates. Of course, if the plan is to provide lump sums based on a comparison between the 417(e) rates and some other basis, this would not necessarily be true. Please do keep in mind the fact that the IRS is not bound by the Gray Book, but it appears from the answer there that the plan could be amended to permit lump sums and not be required to restrict the payment of lump sums. Of course, lots of lump sums would tend to raise the minimum funding from year to year (but probably would not have a major impact on the PBGC premium, since the PBGC segment rates are actually not that different from the 417(e) segment rates). Watch out also to make sure that if adding the option, the likely reduction in the AFTAP in future years would not violate any loan covenants that may be in force. Falling below 60%, if prohibited under an existing covenant, could adversely affect the sponsor more than having to make larger contributions to the plan.

Thanks to all! Very useful commentary! The DRO has not been provided yet for review, so it cannot be determined whether there are, in fact, any conditions in it requiring signature by one or both of the parties in addition to that of the judge (who, it is our understanding, has already signed it).

Suppose a DRO that was signed by the judge and the person who is to be the alternate payee, but not by the participant, is being submitted to the plan administrator. It is not clear whether the participant is willing to sign the order. Would the fact that the participant has not signed off prevent the order from being properly recognized as a QDRO? If it makes a difference, presume that the order relates to a defined benefit pension plan.

I disagree. The trust and the plan are not the same thing. IMHO, there is no "transfer in transit", since any plan can have assets in more than one place. Maybe it's just me. Agreed - my understanding is that, assuming that Plan A is the surviving plan after the merger, all plan assets held by Plan B as of 12/31/14 immediately prior to the merger become Plan A assets immediately after the merger. Moving them from where Plan B held them to where Plan A wants to hold them is just a transaction under the ongoing Plan A. Plan B ceased to exist on 12/31/14 when the merger took place.

I tend to find it disappointing when there is so much focus on the required withholding. The amount withheld is NOT the tax hit. The withholding serves the primary purpose of bringing the tax liability and the amount withheld into a rough sort of agreement. 10% (or even 20%) will often be insufficient to cover all the taxes due on the distribution (which would almost always be treated as ordinary income, over and above employee compensation when the payment is being made to someone remaining in employment). Assuming that all distributions from pension plans will be reported on their income tax returns (thanks to the mandated 1099-R filed by the payer), the bottom line is really covering the tax liability for the distribution. Is it not more or less disastrous when there is not enough withheld, and, come the following April 15, the recipient must come up with $$$$ to cover the unpaid taxes?