rolling over annuity payments

[RLR]

We have a DB plan and the owner is at NRA, at the 100% of comp. limit and continuing to work. There is currently an excess in the plan and as a means of controlling the excess, he could rollover the PV of his AB to his 401(k) plan. Prior to that, we were wondering if he could somehow take some annuity payments from the plan assuming the document allows for this. Ideally, those payments would go to the 401(k) plan as well, but the regs say that periodic payments cannot be rolled over. I don't really understand the reasoning behind that. Any thoughts on how this can be accomplished without purchasing an annuity and then surrendering it and rolling over the proceeds? Any guidance/suggestions would be appreciated.

[SoCalActuary]

If you are looking for Congressional intent for code section 3405, my quick answer is this: the tax deferral is intended to allow for protection of retirement income, so reaching normal retirement is an end point for that protection. Thereafter, Congress expects you to take taxable distributions.

If you are not yet ready to retire, then you can roll over. But you cannot take more than your maximum 415 limit.

No sympathy here for someone who has a guarantee of 100% of pay for life because they now have a taxable benefit.

[david rigby]

If at NRA and 100%, it may make sense to commence annuity distribution (especially if NRA = 62).

[RLR]

If you are looking for Congressional intent for code section 3405, my quick answer is this: the tax deferral is intended to allow for protection of retirement income, so reaching normal retirement is an end point for that protection. Thereafter, Congress expects you to take taxable distributions.

If you are not yet ready to retire, then you can roll over. But you cannot take more than your maximum 415 limit.

No sympathy here for someone who has a guarantee of 100% of pay for life because they now have a taxable benefit.

Thank you for your reply. NRA is 62. Could he take a semi annual or annual annuity payment now and roll that to the 401(k) and then next mo. take a LS of the PV of 100% of his benefit and roll that to the 401(k)? What would be the consequences of rolling over a periodic distribution? He is still working and will accrue an additional benefit this year due to higher avg comp.- still under the $ limit.

[david rigby]

What would be the consequences of rolling over a periodic distribution?

Working or not, most periodic distributions are not eligible for rollover.

As stated above, "...Congress expects you to take taxable distributions."

[masteff]

IRS Code Section 402©(4) in defining an "eligible rollover distribuiton" says in part:

"except that such term shall not include—
(A) any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made—
(i) for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and the employee’s designated beneficiary, or
(ii) for a specified period of 10 years or more,"

I'll throw this out for all the actuaries... could the plan offer a series of payments that was for less than 10 years (say, for example, 3 years) and achieve what the OP is asking?

[SoCalActuary]

Could he take a semi annual or annual annuity payment now and roll that to the 401(k) and then next mo. take a LS of the PV of 100% of his benefit and roll that to the 401(k)? What would be the consequences of rolling over a periodic distribution? He is still working and will accrue an additional benefit this year due to higher avg comp.- still under the $ limit.

Rolling over an ineligible distribution is simply an excess contribution to the IRA. The distribution remains taxable as an ordinary payment, and the excess contribution is subject to the normal penalties. Hopefully, you will understand that this periodic payment is simply a normal taxable distribution at ordinary income rates. If it is reported as a rollover distribution, then it is a partial lump sum payment subject to multiple-annuity rules. You gain nothing under that method.

[david rigby]

The owner wants to delay his taxation as long as possible. The IRS (and by extension, those of us who are taxpayers) want him to pay taxes on the amounts that have previously been tax-deferred. It's time to buck up, and pay up.

[Mike Preston]

I must be missing something. If the plan allows distributions in installments, then elect a series of installments that is not expected to last 10 years and then everything is rollable.

[frizzyguy]

I agree with all the comments made up to this point. RLR, we have all been in this situation where a client is asking us to find something that doesn't exist. (Not fun.) I think it maybe time to try and change their focus from outcomes to make more taxable income deferrable and switch them to focus on how to make the excess assets currently in the plan get used before termination. They need to worry about avoiding excise taxes without giving the kitchen sink to staff.

How many owners are there? How many employees are there? Is the owner at the service max? Are the employees at the 415 as well? Once that solution is done, it's time to refocus on plan redesign to allow the owner to maximize their contributions under the DB-less situation it appears they may find themself in now. All the time, make sure to point out this happens and it couldn't be avoided, they had a wonderful run of deductions using the plan and make sure they understand it's time to set different expectations come tax season.

If they are at the max, it's time for a new solution.

[RLR]

Thanks to everyone for the comments so far. There is one owner and currently one participant. The owner is at the 100% of comp limit with 10 yrs of service and participation. EE is not at the 415 limit. Here are the specifics on the owner:

DOB 6/4/50

NRD 7/1/12

High 3 avg through 12/31/11 $178,566

High 3 avg through 12/31/12 $187,302

PYE 12/31

Could he take an annual payment of $187,302 and then the commuted value next month? At the 1997 ASPPA conference in the IRS Q&A session, this basic scenario was addressed. The question - ASPA: Individual turns 65 on 11/30/97 and retires on 12/1/97 from a DB plan with the first payment due on that date. The plan year and the limitation year are the calendar year. The participant has accrued the 415 limit. Assuming that the plan language is not contradictory, may the plan pay the participant $125,000 as the 12/1/97 payment and then on 1/1/98 commence monthly payments of 1/12th of the 415 limit? Can the plan pay the commuted value of future benefits on 1/1/98, after the 12/1/97 payment of $125,000?

IRS: This would be fine in both cases.

If I understand this correctly, the IRS is saying he could take $125,000 in 12/97 and then a lump sum of $1,447,292 (using 5.5% and RP13CU for illustration and age 65 y 1 m). Does anyone agree/disagree?

Adding to the dilemma is how our document covers late retirement. It says in part that prior to the actual retirement date, a participant shall be entitled to a retirement benefit payable each subsequent PY equal to the greater of 1. the retirement benefit determined at the close of the prior PY or 2. the AB determined at the close of the PY, offset by the actuarial value of the total benefit distributions, if any, made by the close of the PY.

If this means that any distribution in any form that is paid during the PY has to offset the AB paid in the future, then the annuity payment/LS option would not even be available. If I sound confused, I am.

[AndyH]

I must be missing something. If the plan allows distributions in installments, then elect a series of installments that is not expected to last 10 years and then everything is rollable.

Agree. But the accrued benefit must be reduced by the pv of the payments, or at least the pv of the payments in excess of the accrued benefit, right? So what is accomplished?

[Mike Preston]

Can't that provision be removed?