1/2 Annuity Option and 1/2 Lump Sum

[AndyH]

Are companies offering these combinations?

Is future guidance expected?

Does the 1/2 qualify for rollover treatment?

How are you handling this for restricted plans?

[Effen]

Could you be more specific? Are you talking about plans where benefit restrictions are in effect? If so, I don't think you have any choice - you must offer them.

The question seems to be whether or not you can have a form of payment that allows the participant to begin an annuity payment of 50% of the benefit that can be converted to a lump sum at a later date if restrictions are lifted.

Ultimately it is a document issue. We are recommending to our clients that they amend their documents so that if they commence an annuity, they can NOT convert it to a lump sum at a later date. This is mostly for administrative ease.

My understanding is that no additional guidance is expected any time soon.

[AndyH]

Could you be more specific? Are you talking about plans where benefit restrictions are in effect? If so, I don't think you have any choice - you must offer them.

The question seems to be whether or not you can have a form of payment that allows the participant to begin an annuity payment of 50% of the benefit that can be converted to a lump sum at a later date if restrictions are lifted.

Ultimately it is a document issue. We are recommending to our clients that they amend their documents so that if they commence an annuity, they can NOT convert it to a lump sum at a later date. This is mostly for administrative ease.

My understanding is that no additional guidance is expected any time soon.

Thanks Effen. Yes, this is in reference to a 60%-80% restricted plan. I found some discussion of this after I posted, so I understand your comments generally and they make sense, but a couple of things if I may:

1. You seem to imply that 1/2 a lump sum and 1/2 an annuity must be offered. I don't see why that would be required. Why couldn't you offer either/or and simply restrict 1/2 the lump sum in practice similar to the 120% lump sum restriction under prior law?

2. What about the rollover question? I think that is a big one if it does not qualify for rollover treatment.

[Andy the Actuary]

The "towny" pension attornies have agreed that the following is appropriate where R=restricted portion and N=nonrestricted portion. Assume early retirement applies.

(a) participant may defer election on R+N

(b) participant may elect immediate annuity on R+N that is no greater than actuarial equivalent of life annuity*

***** apart from caveat in (b), (a) and (b) are nothing new *****

© participant may take N in a lump sum and

(i) defer election on R or

(ii) take R as an immediate annuity that is no greater than actuarial equivalent of life annuity

Note, that deferral may result in forfeiture upon death if plan does not preserve present value (which of course could be restricted!)

*watch out. I have plan that allows 60 monthly payments as a distribution option. This option could not be elected in respect of R.

[AndyH]

Thanks. I take it that you think the rollover option is available for N under the "bifurcation theory of Big Sky townies"?

[Blinky the 3-eyed Fish]

The N is definitely allowed to be rolled over. It does not have any of the characteristics of a payment that is ineligible for rollover.

[Andy the Actuary]

Thanks. I take it that you think the rollover option is available for N under the "bifurcation theory of Big Sky townies"?

Yes, check out your favorite book -- The Pension Answer Book -- q34:8 (p34-7) of 2005 edition -- for definition of eligible rollover distribution. Not only would it be available but would be mandatory.

[AndyH]

Well, Andy, I have only the online version and I don't see any similarly numbered Q&A and nothing yet that supports a rollover yet. In fact, I read one Q&A that implies NO within the context of installment followed by a subsequent lump sum not being rolloverable which has some similarities I think. What is the title of the Q&A?

Blinky, how is this not part of a series of payments expected to exceed 10 years in duration and therefore not qualifiant? Where are you getting the separation from?

[Blinky the 3-eyed Fish]

I am confused now. Which half are you talking about the non-restricted or the restricted? If it's the non-restricted, that is a lump sum and not part of a series of payments.

[AndyH]

How is 1/2 not part of the other? It seems to me that an argument can be made that only if the second half is deferred does either 1/2 qualify for rollover treatment.

Say you have a plan that provides a life annuity plus a one time payment of $10,000 as an option. I don't see how this would qualify for rollover treatment either.

[Blinky the 3-eyed Fish]

I don't think the 1/2 is part of the "series of payments" nor do I think $10k in your example is. I even looked up a cite for you -- §1.402©-2, Q&A-6(a).

[AndyH]

Well thank you. I was unaware of that cite. I bet you slept in a Holiday Inn Express last night.

[Blinky the 3-eyed Fish]

I spent last night in a ditch.

(bonus points to the one who tells me who uttered that quote)

[GMK]

Elaine

(you know you can google anything)

NO, NOT THE QUOTE THAT'S MY SIGNATURE, THE DITCH QUOTE - BLINKY

[WDIK]

Could it be Lurleen Lumpkin?

[Blinky the 3-eyed Fish]

Give that man a cigar! (another quote, but no, I am not looking for another answer.)

[AndyH]

“Fish and visitors smell in three days.”

qui a dit que ?

[GMK]

Former President Benjamin Franklin (and on occasion, my brother-in-law).

[SoCalActuary]

Former President Benjamin Franklin (and on occasion, my brother-in-law).

Was that the president of the Philadelphia Fire Dept, the post office, or the printing company?

[Andy the Actuary]

Or, was it Aretha's first spouse?