Terminating Plan

[abanky]

I have a plan that wants to terminate. The plan does not offer lump sums... the plan sponsor wants to purchase deferred annuities for all participants. Am I correct in thinking that the annuities must include all rights and features as stated in the plan document?

[ETA Consulting LLC]

Yes and no, depending on what you mean by "all". The annuity much secure the payout stream that is offer in the terms of the plan. For instance, if a participant is entitled to a life payout of $1,500 per month beginning in 2 years, then the annuity that is purchased must provide that payout for that individual participant. You will typically find that the cost of funding those annuities are considerably higher than the amounts within the plan since the actuarial assumption on which the insurance company developed their annuity contracts are different from the actuarial assumptions used for funding the plan. When a participant elects a lump sum (if offered), this cashout becomes a "virtual" wash.

Good Luck...

[abanky]

Believe me, i've told the sponsor of the additional cost... my question is if someone is 35 now with a 1,000 single life benefit at 65, once the participant hits 65, would they be able to choose the forms of benefit (all ae) that is offered by the plan, such as J&S. Also, the plan does not have a death benefit for single employees, if the participant is single now and gets married before they take the annuity do they still get the J&S option of the plan. Also, what about ER?

Again, i have never had a plan do this, but i would think that the annuities would have to be purchased with all the assumptions of the plan (at a way higher cost of course)

[Andy the Actuary]

Agree, the contracts' provisions must mirror the Plan. That said, I've seen (and questioned) terminations where the annuity contracts used the lump sum assumptions applicable to distributions on the purchase date rather than on the actual date of distribution. This didn't sound right but that's what was done.

[David MacLennan]

"Yes" to your question. In fact I think the participant must be allowed to elect his form of payment at the ASD (NRA in this case), and get spousal consent at that time if he elects non-QJSA (he/she can't make the election now because it is over 180 days). Tell plan sponsor the lump sums are a better option - besides, that is what the participants want.

[abanky]

"Yes" to your question. In fact I think the participant must be allowed to elect his form of payment at the ASD (NRA in this case), and get spousal consent at that time if he elects non-QJSA (he/she can't make the election now because it is over 180 days). Tell plan sponsor the lump sums are a better option - besides, that is what the participants want.

The plan sponsors are sure they don't want to pay lump sums... they have no problem paying 140% the lump sum payout value to make sure their ees have a pension at 65. (i wish i had a job with them)

Follow up question, are their annuities that are out there that allow a plan to terminate and guarantee the participant his/her nrb and make it so they can't touch it or sell it to jg wentworth? Also, if that's not possible, can a plan hold annuity policies for all participants in the plan and be guaranteed that they will never have to make another contribution?

[david rigby]

Caution 1. What does the plan say? Does the plan already contain language that requires lump sum distributions?

If so, amending to include PA ability to make distribution via annuity contract may violate 411(d)(6).

Caution 2. You might not be able to purchase individual annuity contracts for deferred payment dates. Insurance companies like to sell immediate annuities, but are less enthusiastic about selling deferred annuities. (If it's a group annuity, this issue might evaporate.)

[abanky]

Caution 1. What does the plan say? Does the plan already contain language that requires lump sum distributions?

If so, amending to include PA ability to make distribution via annuity contract may violate 411(d)(6).

Caution 2. You might not be able to purchase individual annuity contracts for deferred payment dates. Insurance companies like to sell immediate annuities, but are less enthusiastic about selling deferred annuities. (If it's a group annuity, this issue might evaporate.)

1) the plan doesn't allow lump sums if the pvab was ever over 5k.

2) anyone ever deal with a Terminal Funding Annuities?

[david rigby]

Caution 1. What does the plan say? Does the plan already contain language that requires lump sum distributions?

If so, amending to include PA ability to make distribution via annuity contract may violate 411(d)(6).

1) the plan doesn't allow lump sums if the pvab was ever over 5k.

OK, but this issue has nothing to do with distributions upon termination of employment. Rather check plan language to see what it says happens upon termination of the plan. Take special note of any use of "shall" or "must" or "may".