Lump Sums at Plan Term

[Guest mingblue]

If an ongoing plan currently offers a lump sum as an optional form for a terminating or retiring employee, does that same plan have to be amended again before "plan termination" to be able to provide lump sums for current active and vested terminated employees at "plan termination" ??

[SoCalActuary]

That should not require an amendment. Lump sums are already an acceptable option.

[ishi]

What about the ability to cash out retirees at plan termination by offering lump sums? I think the IRS's current thinking is that you cannot, due to the election period and annuity starting date being in the past for the retirees. Did something recently happen to change their thinking (i.e guidance on retroactive annuities), or was this always true?

[AndyH]

I think the issue with retirees is that the valid spousal waiver can only take place at the annuity starting date, so you cannot refuse a lump sum and later elect a lump sum; but that is not being stated as an issue here.

[ishi]

To clarify, in general, are you allowed to offer lump sums to retirees in a DB plan at plan termination, assuming the plan is amended to do so? If not, is this a recent interpretation by the IRS or has it always been so?

[AndyH]

If, when they retired, they were offered a lump sum and chose something else, no.

If they were not offered a lump sum (e.g. the plan was amended later to add that option), yes.

No, this is not new.

[Effen]

Andy, although I never like to disagree with you because I have learned you are usually right, but what would stop a plan from being amended to give the participants a second bite at the apple? Just because the plan offered a lump sum when they retired and they elected an annuity shouldn't preclude the plan from offering a lump sum again at the time of plan termination.

I agree they are not required to offer it, and the participant can't be forced to accept it, but why would simply making the offer be a problem?

[AndyH]

Effen, first, thanks for the compliments.

I don't think the spousal waiver at the time of plan termination is valid because it is not being made 30-90 days prior to the annuity start date. There is no second annuity start date here.

Retiree takes lump sum to the casino.

Spousie has a valid claim I believe.

Or retiree dies and spousie demands survivor annuity.

There are probably other issues as well, not the least of which is failure to follow the terms of the document (unless you amend to specifically allow a second election in which case I think you have a bad document)

[Effen]

What if you get a new spousal consent? Would that work or do you think you still have a problem due to the fairly technical annuity starting date issue?

I have seen this reasoning also applied to restricted distributions. Once the restricted person commences benefits based on the annuity form, they can not change there election to a lump sum when the plan becomes better funded and the annuity is no longer restricted. I'm not saying I necessarily agree with this logic, but I concede it has merit. There are some good old “mgb” discussions about this.

[AndyH]

I don't think you can have a second waiver because there is no second ASD. If there were a benefit increase then that might create a new ASD but only with respect to the benefit increase.

I agree that the restricted payment issue is a related twist. We take the position that the unrestricted lump sum is an additional benefit option that did not exist previously; therefore a new election of that option is permitted. Just like adding a lump sum option at the time of plan termination.

I agree that is debatable but it is practical and it works for me.

MGB was the ASD expert, certainly not me.

I read this all somewhere and was convinced by it-as was our legal department. Sooner or later I will find the source. I thought there was something authoritative that was directly on point but I could not quickly put my fingers on it.

[ishi]

Andy and Effen, thanks for your thoughts.

Andy, if you could find the source, that would be great. We are in the exact situation you described, where the lump sum option was added after the first ASD, and we are trying to justify a second ASD for the lump sum. I recall doing this many years ago, but it seems that the current IRS position is that it is not allowed.

[Guest mingblue]

That should not require an amendment. Lump sums are already an acceptable option.

One could argue that active lives have not incurred a distributable event at plan termination - after all they're still working - and therefore the plan needs to be amended to provide a lump sum ,for example, at plan term ??

[SoCalActuary]

That should not require an amendment. Lump sums are already an acceptable option.

One could argue that active lives have not incurred a distributable event at plan termination - after all they're still working - and therefore the plan needs to be amended to provide a lump sum ,for example, at plan term ??

I don't understand that argument. At plan termination, how do you dispose of the benefits if you don't have

a distributable event? Force annuity contracts on actives? I don't see that on plans I work for.

[david rigby]

Force annuity contracts on actives? I don't see that on plans I work for.

I agree that this is unlikely, but it is possible under the terms of the plan.