Severance Benefit as Part of Early Retirement Window

[Scott]

A company will offer an early retirement window as part of its qualified DB plan. Participants electing to retire will receive an unreduced pension. The company also wants to give the participants a lump sum severance payment equal to 6 months compensation and would like this benefit to be funded by the DB plan as well. The DB plan will be amended to provide for both of these benefits.

Can the severance payment under the DB plan be set forth as a lump sum amount (i.e., "Upon early retirement, a participant shall receive his accrued benefit plus a lump sum equal to 6 months compensation"), or, since benefits under DB plans are usually phrased in terms of monthly payments for life, must it be set forth as a monthly amount for life in an amount that would have a lump sum present value equal to 6 months compensation? In other words, since the normal form of benefit under a DB plan is a life annuity (or QJSA if married), must the employer determine actuarially a monthly payment for life with a present value equal to the lump sum severance amount and allow early retirees to elect to have the severance amount paid as an annuity?

[david rigby]

I think that the J&S rules of IRC 417 will require a "yes" answer to your last question, but I would be interested in other opinions.

[Guest]

I would agree with PAX that some sort of annuity should be contained in the definition of the benefit, but I think that if it can pass the general test under 401(a)(4), than its acceptable.

You may want to consider setting the window up similar to a cash balance formula. Define the window benefit as a lump sum.

Discrimination Testing, on the other hand, probably should be done on a benefits basis. The lump sum would need to be converted to an annuity and tested. The doc should contain the coversion factors used to convert the lump sum to an annuity.

You will have to look at the Regs, but I believe you may also have to add in the basic plan benefit when testing. In addition, I think the window itself must satisfy certain non-discrimination requirements.