Non-Annuitizing Payout Options For DEFINED BENEFIT Plans.

[joel]

Does anyone know of any DB plan that offers payout options for periods other than for one's lifetime? Are such options allowed under the IRC? I am referring to the BASIC BENEFIT; not the DROP option.

[This message has been edited by joel (edited 11-18-98).]

[Guest CVCalhoun]

Almost all defined benefit plans in the private sector allow for payout options for periods other than one's lifetime--most commonly, a lump sum option. And nothing in the IRC would prevent a governmental plan from having such options. The reason that most of them do not offer such options is that governments tend to be concerned about both the welfare costs and the public relations problems which would occur if someone received a lump sum distribution, spent it, and then had no income to support him or her during retirement.

I understand that at least one defined benefit state retirement system offers a lump sum option--but only to people who are living in a different state by the time they request the lump sum. But I have heard about this only informally, and am not sure what state is involved, if this is indeed true.

[joel]

Thank you for your quick reply.

Assume a 20 year payout. Is there full earnings participation? Or is there a guaranteed rate that is factored into each payment,ie 7%?

[Guest Ralph Amadio]

Joel, we have provided over 300 public agency plan defined benefit arrangments which allow for fixed period and various annuitized options. We have obtained determination letters on all of these programs. You are on very solid ground here.

[joel]

Dear Ralph and Carol;

Let's assume a $500,000 Initial Reserve to guarantee a single life option of $40,000 annually to a 55 year old. This is a fixed dollar pension for life. The only increases come from ad hoc cost of living supplements.

Are there DB plans that upon retirement give the retiree the option to make distributions from the Initial Reserve under essentially the same rules as an IRA owner?

[This message has been edited by joel (edited 11-19-98).]

[Guest Ralph Amadio]

Joel, haven't had experience with this particular idea, but it might be worth a private letter ruling request. IRS is usually quite accomodating as long as benefits are actuarially equivalent and the primary qualification issues for distributions are kept whole.