Election to change distribution form

[7806akp]

Has anyone ever heard of a one-time election to change the form of distribution in a DB plan after payments have already commenced (i.e., changing from a J&SA to a single life annuity)? The plan provision allowing for this requires spousal consent and proof of good health of the participant (among other requirements). Is this type of provision allowed under the Code? I cannot find anything stating that it is not allowed, but the actuary and I have never seen anything like this before. Any comments or help in locating guidance one way or the other is greatly appreciated.

[SoCalActuary]

More commonly, the conversion is from annuity to lump sum. But both types of conversion require compliance with 417(a), the J&S rules. Spousal consent is critical.

For larger plans, the anti-selection issue is important, which explains the good-health requirement. For smaller plans, the issue is usually risk management or plan termination, where the participant takes the lump sum risk rather than depend on the continued existence of the plan sponsor who maintains the plan.

Recently, the big auto makers did some of this de-risking, and received the blessing of the IRS after carefully watching for the rights of the participants.

Also, from another perspective, some plans have a J&S option with a bounce up if the beneficiary dies first, so that the amount of payment changes. So you and your actuary should consider other possibilities.

[7806akp]

Thank you so much for the quick reply. Very helpful information. Is there any guidance regarding this type of conversion that you could point me to?

[david rigby]

While I doubt there is anything definitive, I'm skeptical that permitting such change, even if permitted by the Code, would be in the best interest of the Plan. Most actuaries will cringe at the thought of adding this to any plan. If my client asked about this, I would probably suggest that it's a bad idea.

- As SoCal suggests, spouse signoff is important/mandatory. Also, the entire communication process between plan and retiree should be carefully planned. Remember: retirees don't like change, and spouses like it even less.

- Don't forget to make sure this does not favor HCE's.

- Finally, ask the actuary if this plan provision might lead to an increase in the plan's long-term cost, primarily due to revision of the actuary's assumptions about retirement patterns.