Rollover of Restricted Payments

[Andy the Actuary]

An HCE has elected lump sum payment under a plan that provides the pre-termination restrictions prescribed by 1.401(a)(4)-5(b). The plan funded ratio is 93% and the employer will not contribute to increase the percentage to 110%. The Plan also does not presently provide and will not be amended to provide for one of the alternatives (e.g., escrow arrangement) presented in IRS Rev. Rule 92-76.

(1) Is it correct that the life only payment is not elibigible to be rolled over to a Roth or Traditional IRA?

(2) If (1) is correct, is this payment subject to voluntary rather than mandatory FIT withholding?

(3) Presumbably, once the restriction is lifted, the balance may be rolled over? In such case, has the practice been to have the participant make the election to rollover at the annuity start date but then make an election at the time the restriction is lifted in regards to where monies should be invested?

[Guest jjren]

An HCE has elected lump sum payment under a plan that provides the pre-termination restrictions prescribed by 1.401(a)(4)-5(b). The plan funded ratio is 93% and the employer will not contribute to increase the percentage to 110%. The Plan also does not presently provide and will not be amended to provide for one of the alternatives (e.g., escrow arrangement) presented in IRS Rev. Rule 92-76.

(1) Is it correct that the life only payment is not elibigible to be rolled over to a Roth or Traditional IRA?

(2) If (1) is correct, is this payment subject to voluntary rather than mandatory FIT withholding?

(3) Presumbably, once the restriction is lifted, the balance may be rolled over? In such case, has the practice been to have the participant make the election to rollover at the annuity start date but then make an election at the time the restriction is lifted in regards to where monies should be invested?

I just recently came across this situation and concluded (1) Yes - they are substantially equal payments until the restriction no longer applies;

(2) Yes - and (3) if employee wishes to rollover the balance when the restrictions are lifted, then the rollover election would be made at that time - before the restrictions are lifted, there is no eligible rollover distribution so he can't really make the election then.

[tymesup]

We recently had a restricted employee ask for her lump sum. We didn't see how she could make an informed election if the notice said, you'll get this monthly amount for a while. At some point which we can't even estimate, you'll get a large distribution which will be the balance of the money owed to you. We didn't think we could pay her monthly amounts for a while and then let her make an election once the restriction was lifted.

We told her she couldn't get a lump sum now, she seems to have gone away.