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DB Termination-Participant Being Difficult

Randy Watson

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We have a DB plan with 2 participants. One participant has terminated employment. The owner is trying to termiante the DB plan and get the terminated participant's benefit out of the plan. The problem is that the terminated participant is being "difficult" and claims they will not accept a distribution.

I believe the employer can simply purchase an irrevocable annuity for the terminated participant, but I have two distribution questions: (1) Could the employer distribute a Lump Sum to the participant (assuming the plan allows for a lump sum upon the plan's termination)? (2) Alternatively, could the employer unilaterally transfer the "difficult" participant's benefit to the employer's profit sharing plan without the participant's consent? Of course, the benefit would retain the same distribution features of the DB plan and would be tracked separately within the profit sharing plan.

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1. No, unless the value is less than $5000 (and permitted by the Plan).

2. No.

A few prior discussion threads on this topic. Perhaps the PA can advise the EE: (a) a distribution will be made due to the plan termination, (b) if you don't return this form within 30(?) days, the plan will purchase an annuity contract for your benefit. No other choices.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest Jayne Fahlen

Millennium Trust Company provides automatic rollover services with a variety of investment vehicles, including annuity options, that may be an option.

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If the plan were in process of termination, the participant cannot stop there from being a distribution.

a. If the benefit is worth more than $5,000, the plan administrator would tell the participant (as described earlier) to make a timely election or an annuity will be purchased from an insurance company. If the plan while active did not have a lump sum option but lump sums are being offered in connection with the termination, the participant must elect a lump sum now or there will never be one - the annuity need not offer such an option if it was not already in the plan.

b. If the benefit is worth less than $5,000 (but more than $1,000), unless the plan had been amended to eliminate involuntary cashouts between $1,000 and $5,000, there is already in place a default IRA provider (such as Millennium Trust) to whom the money will be paid if the participant fails to make a contrary election* on a timely basis. This need not, in fact, be put off until the plan terminates.

*Refusing to make a timely election concerning the distribution, while contrary, would not be a contrary election, since in all circumstances if a plan terminates the benefits will be paid out in one way or another and there is nothing the participant can do to stop it or even delay it.

Always check with your actuary first!

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