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Lump Sum w/ No Present Intention of Retirement


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Defined Benefit pension plan permits Lump Sum benefit upon retirement (Normal or Early at Age 55). Participant just turned 55, wants to "retire" and take his large Lump Sum payment, and return to covered employment immediately after. He has expressed to the plan administrator and his employer that he has no intention of retiring, but wants to take his lump sump payment now.

The Plan defines Retirement as follows:

Retirement - The term "Retirement" shall mean termination of employment for reasons other than by death after a Participant has fulfilled all of the requirements for entitlement to a Normal, Early, Normal at Age Sixty (60), Normal at Age Fifty-Five (55), or Disability Retirement Pension. Retirement shall be considered as commencing on the day immediately following a Participant's last day of employment, as determined in the sole and absolute discretion of the Trustees.

Thoughts on whether this is permissible?

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It's shady at best. It's impermissible at worst.

Tell the client that the IRS could view this as an impermissible in-service distribution that could open the plan to penalties and sanctions as well as potential disqualification (though I doubt the IRS would go that far) and let them make the decision on whether or not to allow it.

Also recommend they run it by their ERISA counsel before signing off on it.

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The common usage (but not 100%) of the term "retirement" usually includes a separation of employment. Most qualified plans are created for the purpose of providing "retirement income".

Who says the ER will rehire him? If the ER says (in advance) it will rehire him, both could be participating in a fraud. The statute is quite clear that a plan may permit in-service distribution at NRD. Since the proposed transaction is clearly not NRD, it could strongly imply an intent to circumvent the law.

BTW, if this EE is an HCE, a discriminatory practice could magnify the problem.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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The IRS certainly requires that the separation from service be bona fide to keep a distribution from being an impermissible in-service distribution. Returning to the same work in a short time undercuts the assertion that the separation was bona fide.

Perhaps the plan should have a provision that disqualifies a "retiring" participant from any covered employment in the area under the collective bargaining agreement for a year or two.

How many multiemployer plans allow lump sums in the first place?

Always check with your actuary first!

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The law requires that an individual must separate from service before retirement benefits can begin. In order for termination of employment or “separation from service” to occur, there has to be an intention to retire. Separation from service means termination of the employment relationship between the employee and the company with no expectation that the employment relationship would be resumed.

There is a technical advice letter from the Internal Revenue Service dealing with this particular issue. The technical advice request was from a defined benefit plan that had just been declared to be in critical status. As part of the rehabilitation plan, the Trustees had adopted a default schedule, which eliminated an unreduced early retirement pension benefit. The plan was concerned that about 300 people would immediately retire in order to be able to draw this early retirement pension before it was eliminated. The plan was requesting that the service provide a ruling “as to whether allowing participants who are eligible for subsidized early retirement benefits to ‘retire’ on one day in order to qualify for the early retirement subsidy, and then immediately return to work with payment of their early retirement pension benefits suspended (as disqualifying employment), would result in disqualification of the plan.”

In the technical advice letter, the Internal Revenue Service cited a number of regulations dealing with separation from service. Section 1.409A-1(h)(1)(i) of the regulations provides that in general an employee separates from service with an employer if the employee dies, retires, or otherwise has a termination of employment with the employer. Section 1.409A-1(h)(1)(ii) of the regulations provides that whether a termination of employment has occurred is based on whether the facts and circumstances indicate that the employer and employee reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the employee would perform after such date would permanently decrease to no more than 20% of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36 month period.

After discussing the facts and circumstances, the following paragraph appeared in this technical advice letter:

Taken together, sections 1.409A-1(h)(1)(i) and 1.409A-1(h)(1)(ii) provide that when an employee legitimately retires, he separates from service with the employer. Accordingly if both the employer and the employee know at the time of “retirement” that the employee will, with reasonably certainty, continue to perform services for the employer, a termination of employment has not occurred upon “retirement” and the employee has not legitimately retired.

Obviously, quitting work on a Friday, only to start again on a Monday, would not constitute separation from service. In addition, a decision by the employee and the employer that the employee would quit and remain unemployed for a certain time, but then resume employment, would not constitute separation from service. There has to be an intention to retire, and then later on some intervening event occurs, which causes the employee to want to return to work, or causes the employer to ask the employee to return to work.

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Bill, I appreciate the "technical" laid out in your message. But it saddens me to think of all the essentially wasted resources spent on this. Isn't it obvious?

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