Rollover from DC plan to DB Plan

[Guest TedMunice]

I posted this on the Distribution Message Board but thought maybe I'd get a better responce here:

A company has a profit sharing plan that has annuities as a distribution option. In the past they have bought an annuity from an insurance company when a participant wants an annuity. They are thinking of offering a rollover to their DB plan and paying the annuity from there based on the DB plan's lump sum factors. This would be totally at the option of the participant.

Has anybody seen this done? What issues should they be considering before allowing this?

[JAY21]

I'm not sure I can think of all issues, but it seems to me that once it's a rollover to the DB plan the account is no longer subject to any mortality forfeiture, and the plan (DB) would need to allow for such a unique situation (rollover by terminated participant and immediate distribution stream from DB plan). IF they used the actuarial equivalence to determine the "annuity" payable, it really is just an optional distribution pattern and not a true annuity since if the participant died earlier than his life expectancy his dependents should still have a claim to the remainder of the rollover benefit, and if he outlived his stream of benefits, he would not have any claim against the DB plan to continue to pay him benefits not covered by his rollover.

I don't see any way to convert this to a "true" annuity payable for life given it's really a lump sum distribution/rollover to another plan (DB) with distribution taken from that plan (not a true "purchase" of an annuity).

[Guest mjb]

It is permissible to allow rollover contributions to be used to provide an additional annuity benefit under a DB plan. Reg. 1.415-3(b) excludes rollovers a part of the annual DB benefit and -3(b)(iii) provides that the annual benefit attributable to a rollover contribution is determined on the basis of reasonable actuarial assumptions. The risk from the plan's point of view is that the employee will outlive his life expectancy under the plan's assumptions which will increase the cost to the employer for the benefit attributable to the rollover.

[Mike Preston]

The proposed 415 regs have a few more restrictions, to ensure that somebody doesn't roll over monies and create additional funding requirements by having the conversion be, while still "reasonable", lead to an actuarial loss for the plan.

[rcline46]

I bet the DC plan participant CANNOT roll his/her distribution into the DB plan! Since the person is no longer an employee, such a rollover would violate the exclusive benefit rule. This is a disqualifying event for the DB plan.

[Guest mjb]

He is still a particpant which will make him eligible for a rollover. There was an IRS ruling a few years ago that allowed a retired participant who received a lump sum distribution in a prior yr to roll the distribution back to the employer's plan in order to claim a tax benefit.