Retained Lump Sums for Top 25 Employees

[Guest David M]

After coming up empty during 2002 in seeking bonding or restricted IRA solutions to the problem of paying a lump sum to Top 25 employees in a situation requiring restrictions, I was delighted to learn of #24 in the Q&A section of the 2003 EA Gray Book. The solution in the Gray Book seems both elegant and viable, in particular as it keeps the restricted funds in the very plan or trust to which they would need to be returned from a restricted IRA or other vehicle in the event of a financial meltdown of the sponsor and the plan.

My question at this point is, How many practitioners and companies are using this solution? Has it become a preferred solution, or are there sufficient unknowns about the approach to cause one to remain wary (keeping in mind that prospects for bonding or restricted IRAs seem no more positive in 2003 than they were last year)?

Second, if the retained lump sum solution is being used, is an amendment to the plan setting parameters--the earnings rate, for example--appropriate, or is a less formal approach being used?

Thanks to all. I know this has been a vexing problem to many service providers to medium-sized and small companies.

[Guest eafredel]

For those of us who do not have access to the book you are referencing, could you provide an outline of the suggested approach. I am interested in learning of other alternatives to this problem than the traditional approaches you mentioned. Thanks.

[AndyH]

There are detailed discussions about that particular Q&A on this Board if you wish to do a search. My concern is that you are locking in below market interest rates so that the plan is always underfunded even if interest rates rise.

[Guest eafredel]

I found the references to the informal advice given by the Internal Revenue Service at an enrolled actuaries meeting and a good discussion of this issue on this message board. Generally, I do not think defined benefit pension plans should offer lump sum options for larger benefits. However, if a defined benefit pension plan offers lump sums, it seems reasonable that there be some practical way for "high-25" employees to be able to elect the lump sum option while receiving distributions that they may need to provide retirement income. Would a retiree who can talk his or her plan into providing a benefit in the manner suggested in Q & A 24 be entitled to PBGC guarantees if the plan terminated?