Lump Sum Option in annuity contract

[Guest Penelope]

A client is terminating a defined benefit plan that has lump sum distributions as an optional form of benefit. If participants are offered an immediate lump sum upon termination, does the plan also need to buy an annuity contract that gives annuitants (who didn't opt for an immediate lump sum) the option of electing a lump sum distribution upon retirement? It seems to me that participants can get the benefit of a deferred lump sum payment by taking an immediate lump sum and rolling it to an IRA, but I don't see anything in 411(d)(6) regs that specifically permits the plan to eliminate the lump sum from the annuity contract.

This is a pricey feature, and it's not always possible to find a company that will offer it.

[ishi]

I am also interested in the answer to your question, but I would split the question in two:

1) assuming the plan always had the lump sum option

2) assuming the plan was amended just prior to the termination to only provide the lump sum option "upon plan termination"

Any takers?

[Blinky the 3-eyed Fish]

If participants don't respond and their balance is over $5k, they get the QJSA form of benefit and that's it. Their choice to take a lump sum ended with their lack of response.

[Guest Penelope]

If participants don't respond and their balance is over $5k, they get the QJSA form of benefit and that's it. Their choice to take a lump sum ended with their lack of response.

If the plan already lets a participant elect a lump sum distribution upon retirement, wouldn't it be a violation of 411(d)(6) to take that away, even if the plan is amended to give participants the right to elect an immediate lump sum upon plan termination? Timing of a distribution form is protected under the anti-cutback rules and could be valuable. For example, what about a participant who prefers an annuity now, but later develops serious health problems before reaching retirement age and wants to be sure he gets the full value of his benefit? Had the plan not been terminated, he would have had that option.

[Bird]

I agree with Blinky - this is cut and dried. Your right to a lump sum option expires when you choose something else...or effectively choose something else by not responding.

[Guest Kabert]

Have you looked at 1.411(d)-4, Q&A-2(a)(3)(ii)? I think it says you violate 411(d)(6) if you eliminate an optional form of benefit (whether or not upon plan termination) through modification of the optional forms of benefit via specification of the distribution provisions of the annuity contract.

[Guest Penelope]

Have you looked at 1.411(d)-4, Q&A-2(a)(3)(ii)? I think it says you violate 411(d)(6) if you eliminate an optional form of benefit (whether or not upon plan termination) through modification of the optional forms of benefit via specification of the distribution provisions of the annuity contract.

Kabert, I'm afraid you are right. I think 411(d)(6) requires the annuity contract to offer a deferred lump sum even if participants are offered and refuse an immediate lump sum.

Blinky and Bird--do you see a way out of the 411(d)(6) problem?

[Bird]

I could be wrong but I don't see it that way.

[ak2ary]

The right to defer receipt of the benefit is a 411(d)(6) protected benefit that cannot be eliminated at plan termination (with certain exceptions for PS plans). Just because the plan is terminating, you do not get to eliminate optional forms, either immediate or deferred. You cannot force a QJSA down people's throats and you cannot eliminate the ability to defer payment and, at that deferred payment date, elect from the entire menu of optional forms including lump sums. So, if you don't hear from people, you have to purchase an annuity contract that retains all their plan rights, including the right to a deferred lump sum..which is expensive and hard to find.

If the lump sum was not an optional form under the plan but rather was added at plan termination, you may have additional options and it may depend on whether the plan was PBGC covered.

First, you shouldn't amend the plan to provide lump sums "upon plan termination" ... this adds a 411(d)(6) protected benefit. Your amendment should clearly add a window in which a lump may be requested and commence ...for say, 6 or 9 months following the plan term date, If you do not request the lump sum during this period (in which an immediately commencing QJSA must also be offered) the window closes and the lump sum does not have to be part of the annuity contract. Make sure you satisfy the BeRF current and effective availability rules when you do this. There have been rumors that certain PBGC reps are arguing that the closing of the window constitutes a post-termination amendment reducing benefits, which, under PBGC rules, is prohibited. I have heard that they have forced people to make the LS permanent. I think thats a ridiculous stance, but the PBGC is auditing just about all of the terminations, so tread lightly....

[Guest Kabert]

Regarding a lump sum option that only works for a limited time period, I'd want to consider whether such a provision would result in a "significant detriment" under the participant consent to distribution rules.

[ak2ary]

While I see your point, it is hard to believe that the IRS or DOL would argue that adding a window to elect another form of benefits creates a detriment when, in fact, it creates an opportunity. If this was the case, then every early retirement window ever offered would create the same detriment...

[Guest JBauer]

Anybody have any recommended annuity providers for this situation? Client has a terminating plan with a missing participant (whom the client has exercised the required diligence to locate) but needs to purchase an annuity payable at NRA (or earlier, as the participant/annuitant later decides), but with a lump sum feature.

[Guest Kabert]

Anybody have any recommended annuity providers for this situation? Client has a terminating plan with a missing participant (whom the client has exercised the required diligence to locate) but needs to purchase an annuity payable at NRA (or earlier, as the participant/annuitant later decides), but with a lump sum feature.

Why not just turn over the missing participant (and funds) over to the PBGC using their missing participant procedure?

[Guest JBauer]

Why not just turn over the missing participant (and funds) over to the PBGC using their missing participant procedure?

Because the Plan is a money purchase plan, and, to my knowledge, PBGC hasn't yet adopted PPA regulations extending tis missing participant program to cover DC plans.