Implementing a lump sum window for a church plan

[Effen]

I am working with a non-electing church plan with a number of terminated vested participants.  We are contemplating offering a lump sum window.  Is there anything special about church plans that we need to be careful about related to a window?

For example - Do I need to use 417(e) rates as a minimum lump sum value?  Do I need spousal consents?  Do the QPSA rules apply?  Would I need to offer immediate annuities?

I recognize some of this will already be addressed in the plan document, but since I haven't seen the plan document yet, I am just thinking about possible issues.  

I am wondering if anyone has worked on any lump sum windows for a church plan and if they encountered anything out of the ordinary because it was a church plan?  

 

[david rigby]

I've discussed this issue with a sponsoring church (also non-electing), although not yet implemented.  We concluded "the document rules": Use the A.E. definition(s) in the plan; J&S election required only if the plan includes that language.  (If spousal signoff is not required, but you want to include it anyway, get legal counsel signoff on that procedure, since you might be faced with a situation that contradicts the plan document if spouse says NO.)

I doubt you need to include the immediate annuity option; it may seem harmless to include it anyway, as a comparison tool for the participant.  However, it may backfire, especially if the EE is close to retirement age. 

Cautions: (1) watch out for generic language that might incorporate 417 by reference. (2) anticipate the possibility of someone electing the annuity, especially if the person is close to early or normal eligibility.

[My 2 cents]

Even plans subject to ERISA have some flexibility in designing a lump sum window, especially if the plan does not otherwise offer lump sums.

Non-electing church plans may include language about spousal consent, may specify actuarial equivalence factors in line with Section 417(e), etc.  If the plan in question has those sorts of provisions, some coordination of the plan amendment governing the lump sum window with the plan provisions already in place may be a good idea.  Even a church plan ought to adopt an amendment concerning a lump sum window, and the amendment should say how to carry it out.

To the best of my knowledge and understanding, even ERISA plans do not need to include the present value of a QPSA in lump sums to be paid, so I don't see how that sort of thing could come into play for a church plan.

I would anticipate that, barring provisions that may already be in the church plan to the contrary, you do not need to use 417(e) rates for the lump sum window, you do not need to offer immediate annuities in lieu of the participant choosing between a lump sum or leaving the benefit in the plan to be paid as an annuity when it would otherwise have been due, and it is not clear to me that spousal consent would even be required.  Those things are all necessary if the plan is subject to Section 417(e) but not otherwise. You certainly do not need to jump through any funded percentage hoops to pay out the lump sums (but if the plan is already poorly funded, amending in a lump sum window may be a bad idea).

[Effen]

Talked a little more with the sponsor.  The plan is currently 80% funded, so they would like to pay lump sums of 80% value (based on a interest rate still to be determined), no spousal consent, no relative value.  

Is this a common approach?  I assume it is "legal", but it doesn't feel quite right.  

 

 

 

[My 2 cents]

Non-electing church plans, according to my recollection, are not subject to the Section 411 rules prohibiting forfeiture of accrued benefits.  So unless the plan itself prohibits such actions, they can probably write to their terminated participants with deferred vested benefits and say "Hey!  If you want, you can trade your deferred pension in for a lump sum now equal to 80% of the value of your deferred pension (and if you do, then you would no longer have any rights under the plan)."

Am I right in assuming that the plan is 80% funded on the same set of assumptions as the lump sums will be based on? Otherwise, it's apples to oranges (but still probably as legal).