Termination of Cash Balance Plan

[thepensionmaven]

We are in the process of terminating a clients' cash balance plan.  The sum of the account balances will be equal to the value of the investments once the 2019 contribution is made. I realize that as a DB plan, we must give each participant a relative value disclosure of their options, ie lump sum, annuity, 10YC, etc. ,etc.

I have never administered a DB and a participant elect any sort of monthly benefit. They have either elected a lump sum to rollover, or a lump sum to be cashed out.  My software vendor's program provides the options and those dollar amounts that must be offered to each participant

The client is asking what does he do if one of the participants does in fact elect a monthly benefit. If the plan is terminating, where do those options come from?  I could understand an on-going plan paying an annuity for the life of one of the participants out of the plan investment account; if the plan is terminating, the monthly payments can not come from the plan.  If the participant takes the lump sum and buys an annuity, depending on interest rates, the lump sum very well will throw off a different monthly annuity amount than what is shown on the relative value disclosure.

Question from one who has not dealt with this issue in the past, how is this to be addressed?

[Mike Preston]

The plan buys the annuity. Plays havoc. 

[thepensionmaven]

Agreed, but you can't legally talk them out of it.  Let's assume a worst case scenario - a participant elects the annuity of "x", which equates to the lump sum.  The annuity could cost more or less than the actuarial equivalent.  At that point the plan would either pay more or less than they would have  if the participant had elected the lump sum.  This would cause a recalc obviously.

How would this be handled.  I would think the plan would need to make up the difference and the owners would have to waive any difference.  Alternatively, I would think, any windfall would ensure to the remaining participant, not including the owners.

But, the plan is short on a termination basis both because they have only contributed closer to min than even recommended and client must come up with something like 400k which they should contribute prior to any distributions to the other employees, I assume no one should be paid until. ALL election forms received and the owners waive at that time.

Then can all be paid.  Who then is the owner of the annuity, and is this an immediate or deferred annuity.  I would think the actuarial equivalent as of the termination date would be deferred?

As you can surmise I have had no experience of a participant electing an annuity.

[Effen]

"Let's assume a worst case scenario - a participant elects the annuity of "x", which equates to the lump sum."  - it won't.  The annuity will likely be 15%-30% more than the cash balance account value. 

"The annuity could cost more or less than the actuarial equivalent."  Not "could", but "would"

  "At that point the plan would either pay more or less than they would have  if the participant had elected the lump sum."  Not an option.  The Plan would need to provide the benefit required by the plan document.  If that is an annuity, and it costs more than the cash balance account value, the plan still must provide it.

"I assume no one should be paid until. ALL election forms received and the owners waive at that time."  True Dat!

"Who then is the owner of the annuity""  The participant will own the annuity contract

"and is this an immediate or deferred annuity"  Depends on the situation.  If the participant wants an immediate annuity, it will be an immediate.  If they are choosing not to make an election then it is a deferred annuity.  Note, they aren't electing a deferred annuity, they are electing to defer their decision.  The contract you purchase still must include the option for a lump sum and the interest crediting rate stipulated by the document.  This may be very difficult to find, which is why Mike P just responded with a simple "plays havoc".  It can be very difficult to find a carrier willing to provide this annuity.  

Is this a PBGC covered plan?  If so, you may have additional issues to deal with.

[thepensionmaven]

Agreed, but you can't legally talk them out of it.  Let's assume a worst case scenario - a participant elects the annuity of "x", which equates to the lump sum.  The annuity could cost more or less than the actuarial equivalent.  At that point the plan would either pay more or less than they would have  if the participant had elected the lump sum.  This would cause a recalc obviously.

How would this be handled.  I would think the plan would need to make up the difference and the owners would have to waive any difference.  Alternatively, I would think, any windfall would ensure to the remaining participant, not including the owners.

But, the plan is short on a termination basis both because they have only contributed closer to min than even recommended and client must come up with something like 400k which they should contribute prior to any distributions to the other employees, I assume no one should be paid until. ALL election forms received and the owners waive at that time.

Then can all be paid.  Who then is the owner of the annuity, and is this an immediate or deferred annuity.  I would think the actuarial equivalent as of the termination date would be deferred?

As you can surmise I have had no experience of a participant electing an annuity.

[thepensionmaven]

Thanks, Effen. Please correct me if I am missing something here:

From what you are saying, the lump sum based on the actuarial assumptions for providing the  promised monthly benefit that the hypothetical account balance will throw off based on plan actuarial equivalence.

Since this will cost more, depending on the actuarial assumptions as well as guaranteed rates of a particular insurer contract, the client is on the hook for the additional cost.  Granted.  Would this come from the company and/or any additional waiver for each of the three partners, as the remaining participants can not be affected.

 

My deferred annuity experience from insurance company days is usually offered when a participant is making ongoing contributions to a DC plan.

How does one defer the decision to take the annuity when he must do "something" with the benefit that is due? Or is he buying an annuity that promises the payment at his NRD?

These points may seem elementary to you, but as has been stated, I have never in my 35 years experience had any participant elect any form of annuity payment as a termination distribution; from an ongoing plan, yes.

Thanks for the education.

[Effen]

"Would this come from the company and/or any additional waiver for each of the three partners, as the remaining participants can not be affected."    That is correct.  Again, not sure if this is a PBGC covered plan.  If it is PBGC covered, than you are defiantly correct.  The non-substantial owners must receive their entire benefit.  If it is not covered by PBGC, the plan probably has language about prorating the benefits based on available assets. Not very popular, and typically the partners take the hit, but if it is not covered by the PBGC, it is possible to spread the shortfall among all participants.  

 

"How does one defer the decision to take the annuity when he must do "something" with the benefit that is due? Or is he buying an annuity that promises the payment at his NRD?"  That is basically correct, except the plan is buying the annuity, not "he".  The participant is NOT required to "do something" until NRD, and even then he could defer until MRD, and even then if he continues to do nothing the plan should just commence the QJSA.  The plan's termination can't take away any existing options.  The participant isn't even permitted to make an election more than 180 days prior to the commencement date, so legally, they aren't permitted to elect a payment date more than 180 days in the future.  Their option is to elect an immediate payment (lump sum or annuity), or to defer their election to a later date, when the same options must be available.  Yes, the annuity you purchase must provide all available options. 

Recognizing, sometimes this isn't possible because there is no market, so you do the best you can, with guidance from the Plan's ERISA attorney.

 

[thepensionmaven]

Oh, I neglected to mention, this is NOT a PBGC plan.

[Effen]

Then you may have some options if the owners want to share the pain.

 

[Hojo]

On a similar topic, for non-PBGC plans our plan document essentially states that the benefits should be allocated based on PVAB or another non-discriminatory allocation.

I've taken the position that an owner could treat it as a PBGC plan in the sense that all non owners would get their full benefit and then the remainder be allocated to the owners based on PVAB.  It hasn't been challenged to date, but do you think there would be an issue?