Rollover vs. Annuity

[Just Me]

I have a defined benefit plan that permits lump sums as a distribution option. The plan will be terminating shortly. Since a lump sum is not normally available until the participant terminates employment, can we offer actively employed participants the choice of receiving an annuity contract from the insurance company (which would have a lump sum option upon termination from employment) or a direct rollover to the company's 401(k) plan (which would allow a lump sum upon termination from employment)? OR, does the fact that a lump sum is an option under the plan mean that we must offer a lump sum upon plan termination, even though participants selecting annuities won't be payable under the contract until normal (or early) retirement date?

[david rigby]

Likely, the plan already states what options are available upon plan termination. If it includes a current lump sum, then that is one of your options. Very likely.

BTW, if you wanted to purchase an annuity which had a lump sum option, it is unlikely you will find an insurance company willing to sell that product.

[Effen]

.... and if you find one, depending on the size of your group, it will probably cost the plan more than the lump sum would have.

PAX is right, it depends on what the Plan says, but you can always amend it to allow for lump sums at the time of Plan termination. If your plan contains a lump sum provision, the ins. co. will assume everyone will take it, so you will probably be further ahead to just pay the lump sums to the active participants. Why give the money to the ins. co.? The employees will appreciate it more and it probably will cost the Plan less.

[Just Me]

The Plan is silent as to what options are avialable upon termination. Weird, I know, but true.

The employer doesn't want to cash out anybody who is still employed. They don't want employees "blowing" the money, but to have it available if they terminate or retire later.

So, if possible they'd like to offer the "lump sum" but only in the form of a direct rollover to the 401(k) plan. Can a lump sum be limited in this way?

[mbozek]

Upon termination of a DB plan the participants must receive an annuity if they do not elect a LS option. If the PV does not exceed $5,000 a cash out can be the only option. EEs who elect a LS have to be given the right to make a direct rollover to a Q plan or IRA or have the payment reduced for 20% withholding.

[Guest jdinunzi]

Depending on the size and number of active benefits, an insurance company group annuity may suit your needs....if their are enough actives with large enough beneifts any insurance company worth their salt will need to project and make assumptions as to which participants will take their cash and when, in addition to where the GATT rates may be. This is especially true if the Lump sum option is limited to only being available at retirement. Key factors to consider is again size of the group, and are there any retiree's whose a annuities would minimize the lump sum risk.

If you are interested in further detail I can provide.