Rules on NRA with Market-value adjustment

[CFP]

Client's plan sets normal retirement age at 59.5.  We have 6 active employees, all over 59.5, who are invested in the guaranteed rate investment option in the plan.  Per the group annuity contract, if a plan participant takes a non-benefit sensitive withdrawal from the guaranteed rate option, the withdrawal is subject to a market value adjustment.  The market value adjustment formula is punitive. 

The annuity contract specifies that "Participant retirement, as defined in the plan document" is considered a benefit sensitive withdrawal.  The plan document also allows in-service withdrawals at 59.5.

I'm interpreting this fact pattern to say that if I recommend to these 6 participants that they roll over their moneys in the guaranteed rate option to an IRA, that they should all be able to do so without imposition of the market value adjustment.  And they don't have to retire to do so, they can continue working and contributing to the plan.

Is my interpretation defensible?

[Mike Preston]

You need to ask someone at the "group annuity contract."

[Patricia Neal Jensen]

Agree with Mike re asking the insurance company who issued the contract. 

Having written some insurance company annuity contracts, my guess is that this is going to be a problem.  The annuity contract (according to your notes) says "The annuity contract specifies that "Participant retirement, as defined in the plan document" is considered a benefit sensitive withdrawal." 

This contract is "superannuated"  (too many participants at or near retirement age) as issued to this plan and probably should not have been "underwritten" (assuming anyone underwrites any contract in this day)  in the first place.  I suggest you leave well enough alone if the interest rate they are receiving is a good one.  On the other hand,  If the interest rate is a good one (better than they can get now), the insurance company may be delighted to let them out of the contract.  Market value adjustments are rare in this interest rate climate.

Is there someone in this transaction making money by rolling these people to an IRA?   I don't see the logic in this proposed transaction.

[Luke Bailey]

How is "participant retirement" defined in plan document?

[CFP]

On 4/22/2019 at 4:56 PM, Patricia Neal Jensen said:

Agree with Mike re asking the insurance company who issued the contract. 

Having written some insurance company annuity contracts, my guess is that this is going to be a problem.  The annuity contract (according to your notes) says "The annuity contract specifies that "Participant retirement, as defined in the plan document" is considered a benefit sensitive withdrawal." 

This contract is "superannuated"  (too many participants at or near retirement age) as issued to this plan and probably should not have been "underwritten" (assuming anyone underwrites any contract in this day)  in the first place.  I suggest you leave well enough alone if the interest rate they are receiving is a good one.  On the other hand,  If the interest rate is a good one (better than they can get now), the insurance company may be delighted to let them out of the contract.  Market value adjustments are rare in this interest rate climate.

Is there someone in this transaction making money by rolling these people to an IRA?   I don't see the logic in this proposed transaction.

Hi Patricia,

Thanks for your response. 

The contract is not superannuated.  We have 6 out of about 40 employees over 60.   But as would be expected, the older employees have the higher comp and higher balances.  These 6 employees have about 30% of the total account balance in the contract, all in the guaranteed portfolio. 

The client wants to move to a different provider.  Primarily because of this MVA issue.  Client is a bank, fully understands how bonds work, and knows they are being taken advantage of by the annuity company on this MVA issue.  You said MVAs are rare in this interest rate climate.  The current MVA, if they were to move right now, is almost 9% of the guaranteed account balance.  9%!  That’s over 4 year’s interest on the guaranteed account.   And the way the MVA language is written in the contract, it’s almost a statistical impossibility for enough moons and stars and suns to align to ever get the MVA down to zero.  The client is mad at the insurance company for this, and mad at me for getting them into this contract in the first place.

Other than the MVA issue, client has not been unhappy with the plan.  But the MVA issue has been a simmering hot spot for a number of years, and it’s getting worse, not better.

No one is attempting to make money by rolling balances out to an IRA.   If we can get the rollovers to qualify as benefit sensitive withdrawals, that eliminates the MVA on those balances.  Then we can move the plan to a new provider, and the dollars that rolled out to IRAs will probably roll back in at that point.  The whole thing about the IRA was strictly to avoid the MVA.

I know that my 6 people can retire and roll their money out, no issues there.  But they are all still active employees.  My question is, since normal retirement age is set at age 59.5 and we do allow in-service withdrawals, can they roll their money out while still staying on as employees?

Thanks.

[CFP]

On 4/22/2019 at 5:11 PM, Luke Bailey said:

How is "participant retirement" defined in plan document?

I spoke with the TPA on the plan.  She agrees that the 59.5 NRA means that any time after that age a plan participant is allowed to move money out of the plan, no questions asked.  There does not need to be a triggering event like a "retirement", once a participant has reached NRA.  That was my understanding of the NRA definition as well.

[Patricia Neal Jensen]

Sorry you ended up with this really old-fashioned contract.  I assume there are no other transfers to other investments permitted within the contract?  Some contracts have that option but usually not all of the money at once, I grant you that.  Finally, I urge caution.   You won't know how the insurance company views this issue until you ask them or attempt the withdrawal.  They will not care what the TPA thinks.  The MVA should not hurt a participant while they are still in the plan.  You would not want to incur it and then try to fight your way back out of this.  They hold all the cards and have lawyers that get paid every two weeks whether they are fighting your client or not.

Good luck!   PS... I would love to know how this turns out.  Drop us a line, will you?