Optional Annuity Forms Offered to Actives During Plan Termination

[Pension RC]

A DB Plan is terminating. Are the actives offered annuity forms if their lump sums don't exceed $5,000, or are they treated like terminated participants, who just get the lump sum option?

Thanks for any responses!

[david rigby]

In a plan termination, a distribution is made to or on behalf of every participant. The terms of the plan dictate what payment forms are required.

Nevertheless, most plans will make payments something like this (assuming the plan is subject to ERISA):
A. to retirees/beneficiaries currently receiving a benefit as an annuity, either (1) purchase a commercial annuity (i.e., retiree receives no option), or (2) offer a lump sum payment (if the retiree declines option 2, the plan may be required to revert to option 1).

B. to VT and active participants, offer a lump sum. If the LS is over $5K and the participant declines the LS, the plan (probably) must provide the benefit thru purchase of a commercial annuity. If the participant is currently eligible for early or normal retirement, the plan will probably not offer optional forms (as any regular retiree would receive) because that puts this person back in category A. However, there might be some (small) differences in the communications sent to VT participants vs. active participants.

[My 2 cents]

A DB Plan is terminating. Are the actives offered annuity forms if their lump sums don't exceed $5,000, or are they treated like terminated participants, who just get the lump sum option?

Thanks for any responses!

If the lump sums don't exceed $5,000, the actives (and anyone else not in pay status) will be given a choice between a lump sum payment or a direct rollover to an IRA. No plan administrator with any sense would go out and buy an annuity for a benefit worth less than $5,000, plan termination or not. The annuity might cost double the amount payable as a lump sum (assuming you can even find an insurance company willing to sell little annuities like that).

As for the response post, if the lump sum is over $5,000 and the participant (and spouse, if applicable) declines to be paid a lump sum, the plan must buy a commercial annuity, and there isn't any "probably" about it. Further, if the participant is being offered a lump sum (which most will take), the waiver of the QJSA by the participant and spouse is not valid if they are not being offered an immediate QJSA (irrespective of the plan's usual early retirement provisions).

[Effen]

If the lump sum value is <$5,000 - no immediate, or deferred annuity is offered. You need to make sure the plan allows for a forced IRA rollover and transfer any non-responders with LS <$5,000 straight to an IRA. If LS < $1,000, just send them a check and w/hold the 20%.

For those with LS values > $5,000, one other thing to consider, if the lump sum is not currently an optional form of payment, only add it in relation to the plan termination. In other words, make it so that it is only being offered because the plan is terminating and don't make it a permanent option of the plan. Annuity providers don't like paying lump sums, so you want to avoid the option if you actually need to purchase deferred annuities.

One question I had, when you purchase a deferred annuity for an active participant, do they generally need to separate from service in order to collect their retirement benefits from the annuity provider? I think yes, but I wasn't sure if others agree.

In other words, assume I have a active participant who has attained early retirement age. In the process of the plan termination, I offer her an immediate annuity. She declines, so now I need to purchase a deferred annuity. If it wasn't for the plan's termination, she would not have been eligible for the immediate annuity because she didn't separate from service. Does the annuity they purchase need to once again require a separation from service to collect the annuity?

[My 2 cents]

I am not sure, but I think that would depend on the contract between the plan and the insurer. I think that the insurer might require, as a condition under the deferred annuity, that the participant must have separated from service with the plan sponsor. I don't think that it is a statutory/regulatory matter (especially since the active participants will have been offered immediate annuities), and from an administrative point of view, such a requirement would place an extra burden on the insurer (message to plan sponsor: "Hi, it's the XYZ Insurance Company again. Joe Jones has requested that we start up his deferred benefit payments. Is he still working for you?").

The insurer has to live up to the provision if it is there - if the sponsor does not want Joe Jones to be able to claim his benefit and still work there (Joe Jones may be #1 on the list of people they want to have seen the last of), paying him his benefit without verifying that he has terminated, when the insurance contract says that retirees must have separated from service to collect, is a violation of the contract.

[AndyH]

One question I had, when you purchase a deferred annuity for an active participant, do they generally need to separate from service in order to collect their retirement benefits from the annuity provider? I think yes, but I wasn't sure if others agree.

In other words, assume I have a active participant who has attained early retirement age. In the process of the plan termination, I offer her an immediate annuity. She declines, so now I need to purchase a deferred annuity. If it wasn't for the plan's termination, she would not have been eligible for the immediate annuity because she didn't separate from service. Does the annuity they purchase need to once again require a separation from service to collect the annuity?

From my limited experience with such issues, I don't think the contract can require separation from service unless the plan sponsor has agreed to be engaged on an ongoing basis to verify this, or the insurer is willing to accept the participant's representation. And some sponsors would not want to do this. And since the contract is no longer a plan, I don't see any issue with the in-service pension.