Sticky Plan Termination

[Guest Keith N]

I recently took over an underfunded plan that is in the process of terminating. The plan is slightly underfunded based on the lump sums based on the accrued benefit payable at NRD.

The problem is that the plan also contains an unreduced early retirement benefit payble at 55, which the previous actuary was ignoring. This provision makes the plan to be significantly underfunded, if each participant elects it.

My thinking is that each participant will be given the right to take a lump sum (based on annuity at 65) or an annuity commencing at AA or 55 if later, equal to 100% of their accrued benefit. This annuity would be purchased from an insurance company. The current plan provisions do not allow in-service distributions so in order for the participant to collect the annuity, they must terminate employement.

The owner understands that if anyone takes the annuity, he will most likely get very little from the plan.

If the plan is amended to allow in-service distributions prior to termination, is there any problem in letting the participant collect the benefit at early retirement age and continue to work?

My feeling is that if they have to buy the annuities, the insurance company is going to charge them for the full subsidy anyway. If the Plan is forced to buy it, why not let the participant get it?

Any thoughts?

[david rigby]

I'm confused (OK, that's not hard to do):

"If the plan is amended to allow in-service distributions prior to termination..."

What does this mean?

[Guest Keith N]

Sorry, I wasn't clear, I was being too technical. All I meant was that before the plan is terminated, it is amended to allow in-service distributions. That is we are not amending a plan that has already been terminated.

[david rigby]

Isn't plan termination a distributable event?

[Guest Keith N]

Yes, but in my experience only the lump sum would typically be available without the termination of employement.

Even though annuities are bought from an insurance company, the insurance company still needs to administer the plan in accordance with it's provisions. Which means they have an obligation to confirm that those participants who were active at the time of purchase are actually retired before they pay the retirement benefit.

My question is, does it have to be this way and what are the potential problems if the Plan allows the participants to receive retirement annuities without really retiring. (Other than the obvious increase in cost.)

[Guest pensionadmin]

Aren't in service distributions (before plan termination) only available upon attainment of retirement age in a defined benefit plan? Do you want to amend the plan to allow for lump sum distributions? Then, upon termination, participants could elect to receive a lump sum?

[AndyH]

I've been told, and I agree, that you cannot properly permit a lump sum without also permitting an immediate annuity. In such case, the election to take a lump sum (and waive the annuity) would not be within 90 days of the annuity start date, and therefore would not be a valid waiver.

So, in the case of a plan termination, you must either purchase deferred annuity contracts, or offer lump sums, immediate annuities, and deferred deferred annuities. In my experience, nobody takes anything but the lump sum in a small plan setting.

And, in the case of a subsidized early retirement provision, I think the deferred annuity would need to have all the features of the plan's subsidized annuity, which is why insurance companies aren't looking for this type of business except at high cost.