Optional Forms upon Plan Termination

[Guest Mike Spickard]

We have a client that is terminating their Pension Plan that has never allowed lump sums. They want to offer lump sums to active employees only. They want to buy immediate annuities for their retirees and deferred annuities for the deferred vested population, but not offer any lump sum option to the "non-employed" group. This is the first client I have had that wanted to split things up like this.

Anyone run across this before? Is this discriminatory? I think the retiree group is fine, but what about the DVP's? Must they be offered the lump sum like the actives?

They will be filing for a DL with the IRS, so we will find out if it passes muster, but it would be nice to know ahead of time so that my client could be forewarned.

Many thanks in advance.

[Guest Keith N]

As long as the Plan has never paid lump sums > $5,000 in the past, this is not a problem. We have done it several times.

You may also want to consider making the payment for the actives a "one time" option so that if they decline it, the deferred annuity that you purchase does not have to contain the lump sum option. This makes the annuities a little easier to purchase.

Make sure the Plan amendment terminating the plan and creating the lump sum option specifies all of these provisions.

[david rigby]

But also check to see what the plan already says.

[MGB]

To the original question: The only thing you need to be careful about is the possible discriminatory timing of the amendment. If large numbers of NHCEs have just been terminated or retired just prior to the amendment and it is mostly HCEs getting the lump sum, there could be a problem.

To Keith:

I have never heard of a one-time lump sum option. Something doesn't smell right here. Have you gotten clear IRS guidance on this?

[Guest Harry O]

I would think a on-time lump sum option could be structured and analyzed like a window benefit, assuming, as you indicated, you can pass nondiscrimination testing.

[AndyH]

Otherwise, just make the amendment allowing lump sums effective only for any participant completing one or more hours of service on or after _____ date.

[Guest Keith N]

We have had several plans terminated using a "one time" lump sum elections. All received IRS approval letters. One was even audited by the PBGC post termination and they had no problem with it.

I agree that the timing of the amendment can't discriminate. These were all mid-size plans where this wasn't a problem.

[RTK]

I have also used one time lump sum options upon plan termination (for actives, deferred vested, and/or retirees). I set it forth as part of the plan termination amendment, and condition the availability of the lump sum on the plan termination on the intended date. I have never had IRS or PBGC (on audit) object.