Terminating DB plan offering lump sums to retirees. What about spousa

[david rigby]

A non-governmental DB plan is terminating and amending the plan to offer a lump sum to current retirees and beneficiaries. If the annuitant wants the monthly benefit to continue, then the plan will purchase a commercial annuity. The lump sum will be calculated as the present value of all future payments, using the form of payment in effect and the definition of actuarial equivalent in the plan.

The question is what spousal signoff is required for those who want the lump sum?

1. If retiree was not married at date of retirement, is any spouse signoff needed? I suggest NO, even if currently married. However, if retiree elected a J&S with a non-spouse contingent beneficiary, would that beneficiary need to signoff?

2. If retiree was married at original annuity commencement date and spouse is still living

a. J&S was elected, spouse signoff is required, whether now married or now divorced? Presence of a subsequent spouse is not relevant.

b. J&S was waived in favor of a single life annuity. Any signoff required?

c. J&S was waived in favor of a 10C&C with spouse as beneficiary. Signoff required if still within 10 years? Signoff required if now beyond 10 years?

d. J&S was waived in favor of a 10C&C with nonspouse as beneficiary. Signoff required if still within 10 years? Signoff required if now beyond 10 years? Signoff by spouse AND by beneficiary?

Do the applicable regs [i think 1.401(a)-20] require the plan to offer a J&S upon the offer of the lump sum, which might effectively create a new annuity commencement date (I don't think so, but looking for cites and reasoning)? If so, this might create a new requirement for the retiree who was single at DOR but is now currently married.

By the way, if the original election was a J&S and the spouse is now deceased, then the lump sum will be the present value of the single life annuity to the retiree. Anyone disagree?

A somewhat rambling question, but would like any other advice related to the offer of lump sums to retirees. Thanks.

[This message has been edited by pax (edited 11-09-1999).]

[mwyatt]

One point to consider (some research may need to be done to verify):

I think that if you do offer this option, the lump sum will NOT be eligible for rollover as payments were already being made in a periodic fashion. I seem to recall a case back in the late 80's where someone had commenced receiving payments from a profit sharing plan over their life expectancy and then when the plan terminated took the remaining balance and rolled to an IRA. The IRS disagreed and stated that the final lump sum was ineligible for rollover and could only be recognized as ordinary income in the year of payment.

I guess the point is that you should be very sure that these lump sums will be eligible for rollover before proceeding; otherwise your client (and the participants) will be very upset if they take a lump sum and can't rollover the balance.

Any comments?

[david rigby]

mwyatt makes a good point, but my read of IRC 402©(1) and (4) is that the rollover is still available. Anyone agree or disagree?

[Dowist]

On the rollover issue, there may have been an issue under the old rollover rules, which required that the payment be a "lump sum" in order to be rolloverable (good word), and to be rolloverable it had to be paid in one calendar year on account of a particular event. However, even under this old rule, I believe that if the annuity was commuted on account of termination of the plan - that the termination of the plan was a new event and it would qualify as a lump sum.

I think the rule now would probably allow it to be rolled over - as a nonperiodic payment (but it did start out as a periodic payment).

On the spousal consent issue - PAX - you seemed to have done all the research. Here are some practical suggestions: 1. there are lots of ambiguities in these rules - to add the lump sum option, you'll have to amend the plan, so why not add all the rules you think should apply and I'd err on the side of spousal consent - if they're more stringent than is absolutely required, I think that's ok because you've now incorporated them into the plan in adding a new option (since it's new and elective you're not taking anything away) - also you'll get the IRS to review the amendment as part of the termination review. 2. It might be easier to buy the annuity for all participants in pay status.

[david rigby]

Actually, I have a variation on the original post.

Modify the first sentence to be a governmental plan, which means that it is not required to comply with IRC 417. However, the plan does contain the J&S language normally found in non-governmental plans.

Although the plan is not subject to IRC 401(a)(11) and 417, my conclusion of the above circumstance is that the inclusion of the language in the document demonstrates that the sponsor intended the plan to include the J&S requirements, and *therefore* the entire body of regs in this area probably would apply.

I know this gets into the issue of state vs federal law. Any comments on the original or this variation?

BTW, yes it would be easier to buy the annuities, but the sponsor is making the decision to offer this lump sum to retirees. My limited experience in this area is that retirees are very skittish about making changes and many do not understand the alternatives being offered. The time spent doing hand-holding and individual explanations is often quite intrusive to the sponsor. Any others want to share experience with offering lump sums to already retired employees?

[ishi]

Hello PAX - found this oldie-but-a-goodie that matches exactly with a current situation I find myself in. Did you ever resolve the issues in your original post? I'm asking specifically about widowed retirees with j&s benefits and spousal waiver issues similar to the ones you listed.

I know this was a while ago, but any help you can provide will be greatly appreciated. Thanks,

[david rigby]

I did this once, with the following guidelines:

- if original form of payment was LA, no spousal signoff required;

- if original form of payment was 10CC, beneficiary signoff required, unless the CC period had expired;

- if original form of payment was a J&S, we required spousal signoff for the LS option;

- if J&S and the spouse was deceased (whether or not the retiree was remarried), no spousal signoff required;

- the "missing scenario" (J&S benefit, but retiree divorced) did not apply but it should be treated like second bullet point.

In all cases, a written explanation was used to make sure the retiree/spouse understood the options.

In hindsight, this whole thing was a bad idea:

- retirees don't like change,

- acceptance rate is pretty low, thus minimizing the potential savings,

- significant amount of time spent talking to individual retirees.