no response to distribution froms for a terminating money purchase pla

[Guest Elizabeth Gaskins]

we administer a mp plan that we want to terminate prior to april 30th. all notices & distribution forms were sent out over 30 days ago. 1 person has not responded in writing and balance is over $5,000. i did speak with that same participant over the phone a couple weeks ago and she told me she wanted to rollover into an ira. can we just pay her out lump-sum and withhold 20%? or can we mail her a check directly and tell her she has 60 days?(knowing this isn't the preferred method...)

i appreciate any input!!!

[Blinky the 3-eyed Fish]

I am assuming by "terminate", you mean you want to pay out the plan assets of an already terminated plan.

The answer to your question is you must purchase an annuity for this individual that will commence on her NRD. That is your only option and one that does not please most individuals.

I would give her another call and perhaps this may enlighted her into returning her election forms.

[mbozek]

E- you have three options which can be utilized in the following order:

1. contact the part. again and ask her to send u the distribution notice--- I cannot believe that the participant does not want the money. Send her an IRA rollover form if necessary and remind her that the money is free.

2. hold the plan open until she responds within a reasonable time and then buy an annuity -- but this is awful because the plan has to find an annuity provider who will probably not want to issue an annuity for a nominal amount ( LIke below $50 per month).

3. If an annuity is not available or available only at a steep fee/ bad rate then just send her a check for the balance of her account less 20% withholding-- Its not kosher but it is better than

buying an annuity. Your basis for this decision is that would be imprudent/impossible to purchase an annuity at such unfavorable rates and it would be a violation of the exclusive benefit rule since the cost of the annuity would disproportionately benefit the insurance company. The employer should not have to purchase an annuity from a c rated insurer just to fulfill the requirement that all assets be distributed in order for the plan to terminate. In additon keeping the plan open indefinitely would entail unnecessary administrative costs which could be billed to the part. and jeopardize the plans termination. The plan does run an audit risk if the IRS reviews the plan after termination -but this is a low visibility area. If the part. is married there is always a risk from the spouse for 50% of the account but this could be settled. You should consult with counsel before electing this option.

There is one more option- if the employer is establishing another dc plan the assets of this part. could be transferred to the new plan as a deferred J & S annuity benefit.

[Blinky the 3-eyed Fish]

Mbozek, why would the employer subject itself to risk by cashing out the individual in your option 3? Your recommendation to consult with counsel is fine, albeit an additional expense, but any competent counsel would not allow their client to run this risk to protect a participant that is not cooperating.

[mbozek]

Blinky: Competent counsel would present this issue on a risk/ rewards basis based on the facts presented. You dont offer any solution if the employee doesnt take the distribution-- and the plan would be forced to continue in effect indefinitely, including the requirement that it be amended for EGTRRA as well as administrative expenses, 5500 filings etc. Also a plan is only cosidered terminated under IRS rules if all assets are distributed within one year after the determination letter is issued. The reality is that insurers are not going to issue an annuity for small amounts and this should not require that an employer maintain a plan in perpuity because of employee inaction. The employer should make an informed decision based upon the risk of terminating the plan vs. continuing the plan. If client is not willing to elect option 3 then the client's other options include 100% witholding of the account balance to the IRS via a 1099-r. An expensive solution would be to offer the employee a cash bonus if the employee submits a completed distribution form to the employer. Any way u look at it the er must make a choice.

[Blinky the 3-eyed Fish]

My solution is to purchase the annuity. There has to be someone out there to accept this, even if it is disproportionately in favor of the insurance company.

[Guest F1fan]

Elizabeth:

Here is an approach I used in a similar situation. Plan should attempt to get a quote from an insurance carrier(s). Mbozek is correct that options will be limited (especially in New York, if applicable). If the employer has a broker or consultant that it uses for welfare benefits, he or she could be of assistance. Once plan has written quote, send the distribution forms to the participant, along with the written quote, and a letter explaining that if a response is not received by a set date, the plan will proceed with purchasing the annuity. In my case, I sent via certified mail so as to leave no doubt that letter and materials were received. The participant in question quickly returned a completed distribution form requesting a rollover. If your participant does not respond, the plan can proceed with purchasing the annuity. Although the rate/fees may be bad, the participant has been made aware of what the plan will purchase for her, and her lack of reponse is a de facto election to receive it. This obviously involves more work than opting to immedialy distribute in lump sum, but it does avoid potential IRS audit issues, and does allow the plan/trust to be terminated.

[Guest Elizabeth Gaskins]

thank you all so much for your input. very helpful information....i really appreciate it.