Offering Lump Sums to Participants Already In Pay Status

[WestCoast]

As part of a planned standard termination process, a defined benefit plan sponsor wants to permit participants who are already in pay status -- e.g., receiving an annuity form of payment because they've retired and previoiusly elected to commence benefits -- to elect to have their remaining plan benefits converted to and paid in the form of a single lump sum (with appropriate spouse consent if the participant is married).

Has anyone come across this maneuver? If so, is it permissible? How about in the situation where NO plan termination is planned?

Many thanks?

[david rigby]

Yes. At least 2 prior discussion threads on this topic. Try the Search feature.

My experience is:

- retirees don't like change,

- explaining the option to retirees will be much more difficult than you think,

- the retiree acceptance rate will be low,

- there is a potential for PR disaster,

- the additional cost of annuity purchase is not worth the hassle of the above.

[David MacLennan]

I've never seen a lump-sum a participant didn't like. For that reason, and because it gives people more choices, I would think it would be popular.

However, it is fraught with all kinds of technical issues. The lump sum payout creates MASD issues and most valuable QJSA issues. And you would need a pension genius to draft the document correctly. Could you ignore all the technicalities and just do it (sort of like surgery with a chain saw)? I'm sure it has been done before with no consequence or maybe even with IRS approval, but it is a gamble IMO.

[david rigby]

Here is a similar discussion (1999):

http://benefitslink.com/boards/index.php?showtopic=5414

Another point to consider: if the plan is a prototype/VS and does not currently contain this provision, will amending to add the provision remove it from prototype (or volume submitter) status?

[My 2 cents]

Two things to consider:

1. The communications must be unusually clear - you will have to explain clearly enough for an 80 year old retiree and his/her spouse to fully understand the consequences of electing to cancel the ongoing payments (not the least of which involves tax consequences whether or not the lump sum is rolled directly into an IRA). "I didn't understand what I was signing" is hard enough to rebut in a civil suit if the plaintiff is in the prime of life. And there is also the possibility that the ongoing payments were based on a spousal waiver that required that particular form of payment be followed.

2. It is far from certain, with the current interest rate levels, that the annuity would cost more than the lump sum payment.

[Andy the Actuary]

Keeping in mind that no good deed goes unpunished, fixin' what ain't broke may invoke the law of unintended consequences.

[mwyatt]

But in the small plan market (where actual physical retirees being paid out are few and far between) this situation arises all the time with a 5% Owner over 70 1/2.