Severance benefits paid from Pension Plan

[Guest jfsinger]

I've searched for info on this topic to no avail and am hopeful someone can lead me to more information.

I have a client that pays severance benefits from its over-funded pension plans (yes, they do exist!), both DB and Cash Balance plans. My contacts at the company (in Treasury) have been unable to give me details on the mechanics. My vague understanding (perhaps incorrect) is that an employee is given an option to receive a severance benefit in a lump-sum, or to take it as an addition to their retirement account or ultimate pension payments. (most take the lump sum, of course).

Can anyone who is familiar with this arrangement lead me to more information?

Another, related question: Can a Supplemental Unemployment Benefits Plan (SUB Plan or SUB Pay) Trust under 501©(17) be funded with Pension distributions?

Thanks,

Joe

[Effen]

What kind of information are you looking for? The plan document should define the benefit. It could be some sort of "bump" due to layoff or early termination. Sometimes HR/Treasury people use jargon to describe a benefit that isn't really accurate. Get a copy of the document or SPD.

The only sub-pay plans I am familiar with are used by multi-employers and they are funded with employer money. I doubt they could be funded with "pension distributions", assuming you mean money that has been paid to a participant. What would be the point of that?

[Andy the Actuary]

Such benefit should be codified in the plan document. This would be an additional pension benefit that must satisfy 401(a)(4), 410(b), 411(b), 415(b), and 436(d).

[david rigby]

I've seen this before. While it might be convenient, it may not be kosher.

As per Andy's references to multiple IRC sections (and the corresponding ERISA Title I sections), this plan sponsor should make sure this practice is carefully reviewed by its ERISA attorney.

[masteff]

Try searching on keywords {early retirement window}. We offered an early retirement benefit to anyone who terminated under the special program during a certain range of dates. Those people were then able to choose between a lumpsum and a few annuity options; the lumpsum was the normal form of the special benefit (seems like it was years of plan service times either a % of pay or a flat $, can't remember which) and then annuities were calc'd by the actuary. This window benefit was processed separate from the employee's standard benefit under the plan.