We are terminating a defined benefit plan and the client wants to purc

[Guest Lonnie Tomlin]

We have a client that currently maintains a defined benefit plan that it wants to terminate. Current distributions options are limited to annuities. The client wants to require active participants to transfer the lump sum value of their accrued beneft to the replacement plan, most likely a 401(k) plan. I did not think a plan sponsor could do this but another consultant has suggested the plan be amended to add a lump sum option and anyone who elects it must have their balance rolled to the replacement plan. My question is can this be done and if so, what is the citation that permits it? Also, could the plan be amended instead to offer the direct transfer to the replacement plan as a distribution option? I would think it could but if not please let me know why not. Any other suggestions would be welcomed as well. THANK YOU!!

[Alonzo]

Since you don't have a lump sum option in place, you do have a fair number of options. You can add a "trust to trust transfer" option. This is going to look like a restricted direct rollover option to the participant, but is actually authorized by 1.411(d)-4, Q&A 3, not 401(a)(31). If you read that reg carefully, it appears that you can cash-out benefits of $5,000 or less by doing an automatic transfer of assets to the 401(k).

Note that you probably do not want to give your terminated employees this option. Consider offering those employees a lump sum.

[pjkoehler]

Lonnie, can you give us some more facts? Is this DB plan subject to the plan termination provisions of ERISA Title IV? If yes, is it undergoing a standard termination? By and large, the PBGC requires the purchase of guaranteed annuity contracts (what it calls "irrevocable committements") or a transfer of assets to the PBGC in order to process a standard termination. In the absence of individual employee consent to direct rollovers, I doubt the PBGC would approve of a plan level transfer to a profit sharing type plan as means by which the employer would would eliminate plan termination liability. Generally, the focus on establishing a qualified replacement plan concerns eligibility for a reduction in the excise tax rate from 50% to 20% on the amount of any reversion (excess assets) after the plan termination and distribution of all benefits through the purchase of irrevocable committments. Is there a reversion amount in this case?