Plan termination annuities & lump sums

[Guest Keith N]

We are in the process of terminating a db plan that has always paid lump sums. The client is concerned that some participants may elect an annuity.

1) Does the annuity purchase have to preserve the lump sum as an option? If not, why not. Isn't it a "right and feature" of the benefit that must be preserved?

2) If the plan prohibits "in-service" distributions (other than those related to the plan's termination) does the annuity purchased also have to enforce this? In other words, assuming the answer to #1 is yes, if an active person declines the immediate lump sum, can they decide two years from now that they want it? Can they get a "retirement" annuity without actually retiring?

My understanding is that the annuity purchased must preserve all of the ERISA protected plan features and therefore the answer to question 1) is "yes". This would mean that the participant either elects a current lump sum, a current annuity or elects to defer their decision until a later date. This "later date" decision is what the annuity purchased must provide.

Anyone agree or disagree?

[FAPInJax]

I agree that the option has to be included in the annuity. That is why, unless the PBGC takes over the plan (lump sums are not available I do not believe), that buying an annuity actually costs more money than just paying the lump sum.

[Blinky the 3-eyed Fish]

I have never heard of this reasoning, so without looking anything up I have to disagree. At the time of plan termination distribution, the plan ceases to have to preserve anything. It is at that time that any participant with an accrued benefit will choose his benefit form. If he chooses an annuity, whether it be payable in the future or now, he has opted not to take the lump sum. The reverse would be the same if he chose a lump sum. Obviously then, the annuity form does not need to be preserved.

Whether or not the plan allowed for in-service distributions is moot. The plan is no longer after the payouts have been made. Now suppose a participant chose an annuity and then 2 years later wanted a lump sum. Would it be allowable for the insurance company to provide the lump sum? I suppose so, but it would be the lump sum value determined by the insurance company and not under 417(e) rates or the plan's actuarial equivalents.

If that were the case, I could just see a 25 year-old participant who chose a deferred annuity until 65 changing his mind at age 64 and requiring the insurance company to go back 39 years and find that old plan document.

[Guest dsyrett]

My understanding is that if the annuity form is elected by the participant it MUST offer all of the plan benefits including ancillary benefits, all based on the accrued benefit at plan termination. So if a lump sum is available upon employment termination the annuity or "irrevocable committment" has to offer the lump sum. The lump sum would be available at termination of employment, not while employed.

The participant is not electing a particular form of payout at plan termination, but instead is deferring any choice until a later event, such as death, disability, retirement. The irrev commitment would then pay that benefit at that time.

These are obviously specialized annuities and not the garden variety deferred annuities. There are insurers that specialize in this market and they bid based on data, plan specs and market rates.

My experience lately has been that the annuity cost typically exceeds the lump sum value, as Frank P notes.

[david rigby]

At the time of plan termination distribution, the plan ceases to have to preserve anything. It is at that time that any participant with an accrued benefit will choose his benefit form. If he chooses an annuity, whether it be payable in the future or now, he has opted not to take the lump sum. The reverse would be the same if he chose a lump sum. Obviously then, the annuity form does not need to be preserved.

I agree with Blinky's statement only if the employee is given a choice. If the plan terminates and purchases annuities for plan participants, then the plan provisions must be maintained.

[Blinky the 3-eyed Fish]

That I agree with pax. And yes, Mike, I did go from a logical point of view. That certainly doesn't mean it's right. Fortunately, I have never had a person choose an annuity in a plan that terminated or be forced to purchase one for a non-responding participant. Lucky me so far.

Mike, must not have liked his post. It went bye-bye.

[AndyH]

I agree with Keith's initial comments. Let's forget for a minute the participant's election. More important is the spouse's election. The plan cannot force a spouse to elect between a deferred lump sum and a deferred annuity because waiver of the QJSA must be within 90 days of the annuity starting date, which I think is the deferred date.

Each deferred option must be preserved unless, as part of the plan termination, the option of an immediate annuity and immediate lump sum are ADDED as options, and so elected by the participant and spouse.

p.s. I didn't see Mike's comments, but would be curious what they were.

p.p.s. , I think that the answer to Keith's #2 is no, because plan termination is a triggering event as well as separation from service for a distribution.

[MGB]

I would only agree with Blinky and Pax's view if participant and spousal signatures are obtained. If the participant does not reply and the plan buys an annuity, then it must preserve all features, including the lump sum. Also, the participant must have the choice of receiving this kind of an annuity purchase (with all plan provisions preserved). They can be given a separate choice of an annuity that drops the lump sum option but it cannot be the only available option other than the current lump sum.

While I agree most want the lump sum instead of an annuity, it is those that don't respond that creates the hassle.

[Mike Preston]

My comments were only 1/2 done when I had read pax's comment in another window. I intended to not respond at that point, but I clicked the add reply button anyway. I could have edited the post to complete my comments, but there was nothing substantive I had to add other than saying that the IRS' position on the retention of annuity rights and lump sum rights seems illogical to me. Of course, participant elections upon plan termination negate the need.

[RTK]

My take is as follows: The plan must provide a deferred annuity with all protected benefits, including the lump sum option, at plan termination. For participants receiving annuity benefits, the plan must also provide an immediate annuity providing for the annuity benefits.

The plan can offer an (optional) immediate lump sum at plan termination in lieu of the purchase of the deferred annuity, if the plan also offers an immediate J&S as an option. The plan can also offer an immediate lump sum at plan termination in lieu of the purchase of an immediate annuity. The termination amendment must provide for this and the notice and spousal consent requirements must be followed.

[AndyH]

Well stated. I agree 100%.

[Guest Keith N]

Thank you all for the responses.

I'm having a little trouble with this new message board. My browser wasn't automatically refreshing so I didn't know anyone responded and I didn't seem to get the email notification either.

Oh well, at least it looks pretty.

[AndyH]

Keith, it looks like you have to go into your Control Panel email setting and re-check "Enable 'Email Notification' by default?" to YES to get notifications. The same thing was happening to me and your comment caused me to go look at that.

[Guest Keith N]

Thanks for the direction on the email. I would not have ever looked in "My Control Panel" if you hadn't mentioned that. There is lots of interesting setting in there.

Any idea why my browser won't refresh on this site?

[Guest Harry O]

There was an IRS revenue ruling right on point that was issued in 1985, 86 or 87. All optional forms must be protected under the annuity contract.

[Blinky the 3-eyed Fish]

I think 1.411(d)-4 Q&A-2(a)(iii)(2) says it all. Optional forms need to be protected if no election is made, but not if the participants do affirmatively elect one of the forms.