New Benefit Form after Participant Terminated

[JRG]

Client has a DB plan and a Participant left employment 10 years ago, but has a vested benefit. At the time of termination the plan's only form of benefit was an annuity. 3 years ago the Plan was amended to permit participants to receive a lump-sum. Participant is about to become age 65 and wants to elect a lump-sum.

My question is can the participant who terminated 10 yrs ago elect to receive their benefit in a lump-sum? Or do they have to receive an annuity based on the plan provisions at the time of termination?

Thanks.

[david rigby]

It depends on the wording of the amendment. Generally, in most cases (changes required by statute are the obvious exception), an inactive participant will not be impacted by a prospective plan amendment. However, there are "sloppy" plan documents/amendments, so an accurate answer requires careful reading of the plan and the amendment.

However, if the sponsor wants to apply the new provision to apply to prior VTs, likely that can be accomplished with a very simple clarifying amendment.

[Guest Sieve]

I partly agree with David. Although it is true that a terminated vested participant most likely would not be impacted by amendments dealing with the accrual of benefits (since the individual no longer is accruing benefits)--e.g., changes to the benefit structure or calculation of years of service--I would say that if this distribution amendment did not, by its terms, apply only to new accruals or only to active employees at the time of the amendment's adoption/effective date, then anyone who takes a distribution after the amendment's effective date is entitled to a lump sum election. After all, the amendment relates to distributions--and this individual's distribution has not yet occurred.

But, yes, amendments do not always adequately specify to whom they apply. So, the plan then needs to rely on the authority probably given to the Plan Administrator to interpret plan provisions.

[david rigby]

I partly agree with Larry.

His explanation agrees with my experience. However, I've seen many document restatements that include in the preamble a statement that participants who terminate employment prior to the restatement will have all benefits, rights and features determined under the plan as in effect at the severance of employment. Some, but not all, amendments include similar language. If you have any doubt, make sure you get review by your ERISA counsel.

[Guest Sieve]

You can agree with some of the people part of the time, and part of the people some of the time, but you can't agree with all of the party people partly all of the time!

So, I agree with both of us.

BTW, I think the preamble language to which David refers generally is intended to preserve provisions for terminated employees that were in place when that termination occurred, even though some of the provisions may be eliminated as a result of the restatement, but may not necessarily eliminate the application of amendments containing substantive improvements. So, we both compeltely agree that you ought to have your pension counsel opine with regard to this amendment--which means, if counsel drafted the plan, that you'll be told what was intended. And, since you now have a real-life situation relating to this amendment, you might want to revise and wordsmith the prior amendment's language so that the interpretation is embedded in the document.

[JRG]

Thanks!