Terminating K plan--lump sum distribution

[JWK]

Prototype 401(k) plan provides for several annuity forms of distribution as well as lump sums. Sponsor wants to terminate plan. Code section 401(k)(10(B) says distributions upon plan termination must be lump sum. How does this work if a participant elects an annuity? Can the plan not be terminated? Can the plan satisfy this requirement by purchasing an annuity contract for the participant?

[Dave Baker]

I think so -- the purchase of the annuity would be a lump sum distribution "in kind" of the contract, which would not cause income taxation immediately to the participant due to the special rules for taxing annuities in Code section 72.

I guess the idea is that the trust is clearing out all of its assets. (If the trust continued to operate, e.g. to make further installment payments, then it ought not to be making payments to pre-59-1/2 persons despite the trust's "termination.")

[Guest JWBrown]

Does the prototype base document or adoption agreement address which forms of payment are applicable at plan termination? Perhaps the plan language itself provides for lump sums.

Just a thought...