Paying Annuities from a DC Plan--Does Norris Apply?

[Guest Grumpy456]

I posted this question on the Distributions Message Board, but no one seems to know the answer (or will respond). Since this is an annuity issue potentially involving the Norris case, perhaps I should have posted my question on this Message Board to begin with. Thanks, in advance, for any guidance.

A DC plan offers a single life annuity as a payment option. A participant has selected the single life annuity. Her vested account balance is about $17,500. If the DC plan elected to make the annuity payments itself, I believe, in order to comply with the Norris decision, it would have to compute the payments using sex-neutral mortality assumptions. Instead, the DC plan wants to purchase an individual annuity contract from an insurance company it selects (which is essentially what happened in the Norris case).

The largest monthly quote that we obtained from an insurance company provides the participant with a monthly payment of about $120 for life. However, the quote is based on a female-specific mortality table. A female-specific mortality table generally assumes higher mortality (higher when compared to a male specific mortality table) which means that a female recipient is presumed to live longer than a male and, as a result, to receive a smaller monthly payment than an identically-situated male would receive.

Is the DC plan required to purchase an annuity based on a sex-neutral mortality table? I don't know whether the Norris decision applies to the purchase of an annuity contract? Although, if the DC plan would have to make the annuity payments using a sex-neutral mortality table, it seems to me an annuity contract purchased from an insurance company would also have to use a sex-neutral mortality table (otherwise, the purchase of an annuity would be an easy end-run around the Norris decision). Can anyone help me here? How are other TPAs handling this issue?

A lawyer I spoke with says Norris doesn't apply--he didn't/wouldn't tell me why. An enrolled actuary I spoke with told me that Norris applied, but that virtually no insurance companies provide individual annuity contracts using unisex mortality assumptions.

[Guest mjb]

Norris was decided under Title VII of the Civil Rights Act of 1964 which prohibits sex discrimination in employment. Title VII applies to employers of 15 or more employees. All MP plans subject to ERISA must offer a J & S annuity as the normal form of benefit and if subject to Title VII must provide same annuity benefits to members of both sexes (which is why MP plans should be terminated since most ers would not /cant find ins co to provide annuity quote). Literally interpreted Norris only requires that the same benefit level be offerred to both sexes, e.g., the female rate, male rate or unisex rate. Of course this problem is avoided if ee elects a lump sum.

If the lawyer would not tell you why Norris doesnt apply why would you accept his (free?) advice?

[Guest Grumpy456]

I'm not sure whether you believe the Norris analysis applies to a DC plan that provides an annuity option involving life contingencies or not. Assume the DC plan is not a money purchase pension plan (not that that should matter). If the DC plan provides, as a distribution option, an annuity involving life contingencies and the DC plan itself will make the payments, must it use a unisex table in computing the monthly annuity payment? Consider an easy example.

Bill and Sarah are each 45 and each have vested account balances of $50,000. They both terminate at the same time and, as a result, become eligible for distributions. They both elect to take their benefit as a single life annuity. The plan uses the 83GAM Male table to compute annuity payments to males and the 83GAM Female table to compute annuity payments to females. Consequently, Bill will receive $294.37 a month, for life, and Sarah will receive $276.75 a month, for life. Does this methodology violate Title VII as a result of the Norris decision?

I think the lawyer's conclusion that Norris doesn't apply is wrong. I am hoping that someone else who is involved in the purchase of annuities can give me a reason why Norris does or does not apply. The lawyer may be right, but my inclination, after reading some material on the subject (which oddly is not clear one way or the other) is that the lawyer is wrong.

If I am right and Norris prohibits the plan from using the methodology described above, it would see strange if that same methodology could be used by an insurance company if instead the annuity is purchased from a carrier. That seems like an easy end run around the requirement that annuities involving life contingencies must be computed using the same mortality rates for both males and females. What do you think?

[GBurns]

Note that the actuary said "virtually no", which means that there are a few insurance companies which might be able to solve your problem. See if he/she is willing to name a few and hope that those are acceptable and that the amount is not too small for an SPIA. Then make provisions for any future cases.

[Guest mjb]

Under Title VII it is the employer who cannot discriminate in providing an annuity whether by offering an ins co annuity or by providing the annuity benefit directly. It doesnt matter what type of DC plan provides the annuity benefits. In the Norris Case the Univeristy of Arizona offerred a 457 plan for voluntary employee contributions which was funded with individual annuites using sex distinct payment tables. As I explained previously, under Norris the payment amounts cannot be different on account of sex but there is no requirement that any particular table be used. The plan could use a blended table that pays the same amount to men and women at the same age. Or it could use the same table (male or female) to make payments to members of both sexes.

[Guest Grumpy456]

Ok, mjb, let's try again:

Bill and Sarah are each 45 and each have vested account balances of $50,000. They both terminate at the same time and, as a result, become eligible for distributions. They both elect to take their benefit as a single life annuity. The plan uses the 83GAM Male table to compute annuity payments to males and the 83GAM Female table to compute annuity payments to females. Consequently, Bill will receive $294.37 a month, for life, and Sarah will receive $276.75 a month, for life. Does this methodology violate Title VII as a result of the Norris decision?

mjb's answer to my question, "does this methodology violate Title VII as a result of the Norris decision?" appears to be "yes, because that methodology does not use the same mortality assumptions for both males and females."

I think mjb is correct that the mortality assumptions used to compute the monthly payment must be the same for both males and females, i.e., use male assumptions for everyone, female assumptions for everyone or unisex assumptions for everyone.

I hope I didn't mistate your position, mjb.

Assuming mjb is correct (I think he/she is), then are TPAs able to find such products for their clients or are they ignoring the Norris decision mandate?

[Guest mjb]

You have stated my position correctly. The reason why the annuity options is not a problem in most DC plans is that participants take a lump sum or elect MRDs which are unisex payments. ( No annuity option is offerred under the plan). The only time an annuity option subject to Norris must be offerred is when an employee terminates from a money purchase plan which must offer an annuity as the normal form of benefit.

[Bird]

This piqued my curiousity so I did a little research; my initial thought was that Norris did not apply, but it seems that this situation is actually pretty much what Norris itself was about. And the majority opinion essentially said "tough nuts if you can't find an annuity provider willing to offer sex-neutral annuities."

Which is silly, because if a plan offers LSs and sex-neutral annuities, a male who wants an annuity will take the lump sum and buy an annuity outside the plan, perhaps from the same insurance company on a male-based table, which will pay a hgher benefit. The insurance company will realize this and price the "sex-neutral" table as a female table.

My solution would be to offer the retiree a lump sum or an annuity, where the annuity rates are based on assumptions (sex-neutral of course; well, it could be a male or a female table as long as you use the same one for both) and explain that if you go out on the market as an individual you can probably find a better rate. So she does a rollover to an IRA which pays an immediate annuity. For plan purposes, she was offered a lump sum and a sex-neutral annuity, so you're OK.

[AndyH]

I have never heard of a DC plan that provides annuity payments that reflect life contingencies.

Doesn't that make it a DB plan?

[david rigby]

... and explain that if you go out on the market as an individual you can probably find a better rate.

I cannot imagine the sponsor wanting to make such statement to an employee.

[RTK]

Andy, I think yes - it is a db plan if a life annuity paid is from plan assets (and not by purchase of life annuity from insurance company with account balance).

There was a long post a number of years back on this issue, with one group arguing you could provide a life annuity from a dc plan account by adjusting the amount each year based on then account balance and remaining life expectancy. Was not very convincing.

[Guest Grumpy456]

So a money purchase pension plan is a defined benefit plan if it pays a single life annuity to an unmarried participant directly, for example, but a defined contribution plan if it purchases an SPIA from an insurance company? That doesn't seem to make much sense to me. Under that theory, is a defined benefit plan really a defined contribution plan if it permits lump sum payments and every participant in the history of the plan has selected a lump sum payment?

[Guest Navysalad]

So a money purchase pension plan is a defined benefit plan if it pays a single life annuity to an unmarried participant directly, for example, but a defined contribution plan if it purchases an SPIA from an insurance company? That doesn't seem to make much sense to me. Under that theory, is a defined benefit plan really a defined contribution plan if it permits lump sum payments and every participant in the history of the plan has selected a lump sum payment?

No, a DB plan is not defined by virtue of paying annuities, it is a plan that has "definitely determinable" benefits based upon a formula -- as opposed to a DC plan, which is a plan where the benefits are determined by virtue of the accumulation in an individual account. The fact that the account balance is allowed to be paid in the form of an annuity (something all Money purchase plans must permit) does not create a DB plan. Actually, if you look in the Code, you'll see they start out by defining an individual account plan, then say a defined benefit plan is a retirement plan "other than an individual account plan". How the benefits are paid is not important.