terminated plan, last participant not responding

[AlbanyConsultant]

What options, if any, are there for a terminated defined benefit plan where I've got one participant left and she is not returning her distribution forms? On the DC side, we're forcing her to an automatic rollover account (pursuant to a bunch of notices), but I don't think that's an option on the DB side, is it? Her lump sum benefit is $6,000 (of course it is). Thanks.

[Andy the Actuary]

Purchase an annuity that retains all Plan election options and features. Since you found her, I don't believe she qualifies for the PBGC missing participant program if the Plan is subject to PBGC.

[JAY21]

Be prepared to find it difficult to find an insurer that will offer this on a 1 life plan. I had a similar situation recently with 3 participants recently who had total benefits with a present value of around 200k and we were working through a broker that specializes in pension annuity purchases and even with all insurers available to us we could find only 1 insurer that would bid on it and the price was about a 50% premium over the aggregate 417e lump sum amounts under the plan. Boutique market commands Boutique prices. I agree with Andy that this may be the only approach but it's real unfortunate when this happens.

[Lou S.]

Not the best solution but if the Trustee is willing, have him/her drive to the participant's house for them to fill out the forms (with spousal consent of course). Not always practical I realize but can work in a pinch if participant is just being lazy and Trustee is motivated to get signed forms.

[Andy the Actuary]

Lou's suggestion is a good one provided the participant has not relocated to Madigascar.

[Lou S.]

Lou's suggestion is a good one provided the participant has not relocated to Madigascar.

LOL, that's why I said it's not always practical!

[david rigby]

No automatic rollover is not an option.

Inform the participant that the plan must distribute her benefit. If she fails to make an election, the plan will make the election for her, and that is an annuity payable in the normal form (or J&S if applicable). As mentioned by JAY21, it may be difficult to purchase that annuity (but you don't have to tell the participant). When she finds out that her benefit will be $8/month for the rest of her life, maybe she will sign the form.

[Andy the Actuary]

Unless the law of the p.o.ed employee is at play. This could possibly be a long-service young low-paid employee who was expecting a lot more.

[My 2 cents]

No automatic rollover is not an option.

Inform the participant that the plan must distribute her benefit. If she fails to make an election, the plan will make the election for her, and that is an annuity payable in the normal form (or J&S if applicable). As mentioned by JAY21, it may be difficult to purchase that annuity (but you don't have to tell the participant). When she finds out that her benefit will be $8/month for the rest of her life, maybe she will sign the form.

Maybe I am misunderstanding the comment here. Why would her benefit be $8/month? Remember, she gets the full accrued benefit. If the lump sum would have been $6,000 and it costs $10,000 to buy an annuity for the same periodic benefit that the lump sum is based on, the plan must spend $10,000. You cannot pass any of the costs or expenses on to the participant in a defined benefit plan.

Unless the law of the p.o.ed employee is at play. This could possibly be a long-service young low-paid employee who was expecting a lot more.

If the participant is young, the plan may be required to offer an immediate annuity to validate the potential choice to waive the QJSA to take a lump sum, but if no election is made, you will be buying an annuity deferred to normal retirement age, not an immediate annuity.

So the participant would be given an option to take an immediate lump sum, have an immediate QJSA purchased, or have a deferred benefit purchased (options to be determined at commencement age). Pick one or we purchase a deferred annuity.

[david rigby]

The reference to "$8/month" should have pointed out (my assumption) that the insurer will sell the annuity only on an immediate basis, so the monthly benefit will reflect some type of early commencement.

[My 2 cents]

There are probably insurers out there perfectly happy to sell annuities deferred to 2035, with appropriate margins to cover the pension plan's early/late retirement provisions and optional forms (with the plan's conversion factors). Unless there are others desiring annuities, you may need to buy an individual annuity. What is being done with retirees (if the plan has any)?

The only reason an insurer might prefer an immediate annuity is because its commencement date and payment form are fixed (assuming, of course, that you know the participant's marital status and, if married, the spouse's sex and date of birth).

[Andy the Actuary]

Anyone interested in forming an insurance company to accommodate orphan annuities? I thought we'd call it HHIC. It would offer annuities for the nuisance cases. It would build in appropriate expense margins and for interest and mortality guarantees, but mostly for high profits. HHIC is an acronym for Hold Hostage Insurance Company.

[chc93]

The reference to "$8/month" should have pointed out (my assumption) that the insurer will sell the annuity only on an immediate basis, so the monthly benefit will reflect some type of early commencement.

This was my recent experience. If the deferral period is more than a few (5-10 years, I forget), the insurance companies wouldn't even give a quote. Quotes provided for only immediate annuities.

[jpod]

I realize that this might be the last technicality which IRS and/or PBGC may care about, but I didn't think you can force an immediate annuity on someone who is younger than NRA.

[david rigby]

I realize that this might be the last technicality which IRS and/or PBGC may care about, but I didn't think you can force an immediate annuity on someone who is younger than NRA.

Correct, if the value is > $5000. Of course, this is a plan termination, so some type of distribution is being "forced".

However, if you cannot purchase the annuity exactly as the plan provides (since there is no vendor willing to sell it), what choice is left? IMHO, the remaining choice is to buy what the insurer will sell, which is (under my assumption above) an immediate annuity and it may also include the default J&S. This is the information that might be used to convince the participant to elect the $6,000 lump sum rather than refusing to sign the form.

The insurer may be more flexible if the purchase price is greater than some minimum amount, based on its own internal marketing conditions. In these comments, I'm only reflecting my opinion, and not any detailed survey of insurance company practices.

[AlbanyConsultant]

Apologies for resurrecting this thread, but I found out why the participant wasn't returning her forms: she and her husband are splitting up, and he is refusing to sign the spousal consent. I know we've got to tread carefully around this kind of situation and have called in an ERISA attorney, but the plan is terminated and the business has closed up - the money has to go out somehow, doesn't it?

In the meantime, if anyone is willing to provide contact information for annuity companies that have taken on things like this in the past, I will optimisitcally try to get that process started. Thanks.

[Andy the Actuary]

This is not difficult. Apply the default which is either to buy a deferred or immediate annuity in accordance with the election package. Presumably, the package told the participant what would happen if the package was not timely returned.

[david rigby]

Apologies for resurrecting this thread, but I found out why the participant wasn't returning her forms: she and her husband are splitting up, and he is refusing to sign the spousal consent.

IMHO, the answer does not change. Give the same argument to the spouse as to the participant: if the plan buys an annuity, it's $8 per month, or the plan pays a lump sum. In either case, you (the spouse) might have an opportunity to get a share, in the property settlement.

(Of course, I'm not suggesting the plan representative talk directly to the spouse, unless the participant suggests.)

As AtA suggests, the plan may have a deadline, and it may be too late. Sorry.

[Lou S.]

Apologies for resurrecting this thread, but I found out why the participant wasn't returning her forms: she and her husband are splitting up, and he is refusing to sign the spousal consent. I know we've got to tread carefully around this kind of situation and have called in an ERISA attorney, but the plan is terminated and the business has closed up - the money has to go out somehow, doesn't it?

In the meantime, if anyone is willing to provide contact information for annuity companies that have taken on things like this in the past, I will optimisitcally try to get that process started. Thanks.

Out of curiosity is the Plan AE $6K or the 417(e) rates $6K? If the later is it possible that that PVAB will be under $5K next year? If so maybe use that as leverage to get spousal consent to rollover to IRA and have them divide the IRA in the divorce?

[My 2 cents]

Apologies for resurrecting this thread, but I found out why the participant wasn't returning her forms: she and her husband are splitting up, and he is refusing to sign the spousal consent. I know we've got to tread carefully around this kind of situation and have called in an ERISA attorney, but the plan is terminated and the business has closed up - the money has to go out somehow, doesn't it?

In the meantime, if anyone is willing to provide contact information for annuity companies that have taken on things like this in the past, I will optimisitcally try to get that process started. Thanks.

Out of curiosity is the Plan AE $6K or the 417(e) rates $6K? If the later is it possible that that PVAB will be under $5K next year? If so maybe use that as leverage to get spousal consent to rollover to IRA and have them divide the IRA in the divorce?

The November 2014 417(e) rates that were published a couple of days ago, to the extent applicable to the terminating plan (for example, if it is a calendar year plan using the rates from the second month preceding the start of the plan year for 417(e) purposes), are likely to increase the value of the benefit. The second and third segment rates are a good deal lower than the November 2013 rates, which could significantly push up the lump sum equivalent for a participant well below retirement age. That $6K could easily go up to $7,000 or more (and it almost certainly will not fall below $5,000).

Also, how long can payment be delayed before the termination itself is jeopardized? Isn't it 180 days after the 60 day waiting period following the Form 500 PBGC filing (or, if applicable, 120 days after receipt of the IRS determination letter if later)?