436 bifurcation question

[AndyH]

A plan with a lump sum provision becomes restricted and the participant wants to receive a lump sum benefit.

May the plan state that the lump sum election is irrevocable, so that when the plan becomes unrestricted the unpaid portion is then paid as a lump sum without any optional forms of benefit (including a QJSA) being offered?

[Andy the Actuary]

The plan could certainly be amended to give participants -- even those who elected a life only payment form -- to get a second bite at the apple. I.e., there is but a single annuity starting date. This seems similar to the operation of the benefits restrictions on HCEs under 401(a)(4). In your case, the participant would elect lump sum payment with the understanding that monthly payments will be made until such time as the lump sum could be paid. While I'm not an attorney, sounds okay so long as the plan language is clear.

Caveat: There could be problems if the Company's philosophy changes and for example, does not request the actuary to certify the AFTAP. In such case, the AFTAP defaults to less than 60% irrespective of the plan's funded status. So, the employer would then be exercising discretion that affects the special lump sum option previously elected.

[AndyH]

Thanks for your comments.

The plan administrator does not want to offer a second ASD, but is it required? That is basically the question, whether a second ASD is required.

I'll count your vote as a No. Thanks.

[david rigby]

Sorry, no opportunity to check the reg, but it sounds fishy to me (that's the technical term).

Suppose the EE is unmarried at initial ASD, but is married when the restriction is removed.

Not sure if this matters, just wondering.

[AndyH]

We used to get help with fishy things from The Blinking One, but maybe he has found another pond.

I have not found in the regulation where the second payment is not a new ASD, so I agree with the marriage issue being an issue. Other issues include how to handle post-70.5 for a terminee, what happens upon death, etc.

[Guest Kabert]

Don't the regs/preamble answer this? I have always thought that the default under the regs is, if the plan is 60-79% AFTAP, the participant can elect a 50% lump sum, with the remainder to be commenced at the same time as an annuity (under one of the plan's annuity options). The other default is, the participant must be able to say "no thanks, I'll wait on my distribution" and delay receiving any payout whatsoever until a later date (subject to 401(a)(9)). As a third optional provision, a plan sponsor could amend its plan if desired (not required) to permit participants to split up their payout -- i.e., the 50% lump sum would be paid right away and the remainder of the benefit would be paid at a later date. The idea at the later date is that, typically, the participant would wait until the plan is no longer restricted and then elect a lump sum with respect to the rest. But, if desired, the participant could always decide he doesn't want to wait any longer and elect an annuity; of course, the participant could not push off payment of the remainder beyond when 401(a)(9) would require commencement.