Can plan termination affect annuity already in pay status?

[Guest TaxedToDeath]

A relative retired a couple years ago and elected a monthly annuity form of distribution from his company's defined benefit plan, which has already commenced payment. That plan now is terminating. The relative received a communication telling him he would receive a reduced lump-sum payment from the plan instead of the annuity benefit that he has been receiving. Must he accept this reduced lump-sum payment? Shouldn't the plan instead use the requisite assets to purchase an annuity product in order to continue the monthly annuity payment as elected?

[david rigby]

Shouldn't the plan ... purchase an annuity product in order to continue the monthly annuity payment as elected?

Probably so, assuming the plan is subject to ERISA. Is it possible the plan has offered the retiree an election to receive a lump sum?

[Andy the Actuary]

How much was the check?

It's possible that the Plan was using a minimizes cash-out rule, which IMHO is a misapplication. I have seen the IRS approve terminations where the participant was given an opportunity to elect lump sum payout, but then I believe you would have to jump through all the annuity start date hoops of offering all options and requiring spousal consent.

[K2retire]

I have also seen overfunded plans offer an additional benefit amount that participants thought were going to be a reduced amount. The notice must be read very carefully.