Permissibility of lump-sum and life annuity

[YankeeFan]

In a defined benefit plan that allows lump-sum distributions, would it be permissible for a participant to elect to receive their benefit partially as a lump sum and the remaining amount in the form of a life annuity from the plan? If it is permissible, would the plan need to be amended to allow for this hybird form of benefit?

[Mike Preston]

Yes, it is permissable.

Yes, the plan must provide for it as an allowable option.

Most plans probably don't have the language in place that would enable this automatically, so an emendment is most likely required. However, it is possible that the language of the plan gives the Plan Administrator enough discretion that such could be paid without reuqiring an amendment.

Section 415 limits are quite tricky when dealing with benefits that are partially paid in a lump sum, so if somebody is close to the maximums under Section 415 then one should tread with great care.

Also, recognize that benefit forms are a "benefit, right or feature" that must be made available to a non-disccriminatory class of participants. That usually means that if it is implemented, you will have to allow it to all who are entitled to benefits.

[AndyH]

And, the "lump sum" portion may not qualify for rollover treatment.

[MGB]

Two other issues:

1. This type of option triggers 417(e) rates and mortality on the entire calculation (because it is not a "nondecreasing annuity"). You may not rely on the conversion factors in your plan to arrive at the annuity amount (assuming the annuity chosen is not the normal form), and must first calculate a minimum annuity amount using 417(e) rates and mortality.

2. If this is a contributory (after-tax) plan, the lump sum must be pro rata between the employee contributions and the remaining benefit. For this purpose, the present value of the total benefit must be calculated under Section 7520 rules (estate valuation), which 99.9% of pension practitioners have never had to deal with (it is based on a rounded 120% mid-term AFR and the mortality from the decennial census statistics).

[Guest Harry O]

Andy H -

Why would the lump sum NOT qualify for rollover?

[AndyH]

Regarding the rollover, my thinking was that the lump sum would be part of a series of payments extending over more than 10 years, therefore not qualifying for rollover treatment.

This isn't 100% clear (at least to me) because the payments are not equal; thus I said "may" not. I was trying to raise the question. I'm not completely sure whether it would or not.

Plus, anything I can do to confuse a Yankee fan is a plus from where I come from!