Plan termination with early retirement subsidy

[AndyH]

Plan sponsor wishes to consider a "rule of 90" (or maybe 85) (combination age and service) unreduced early retirement subsidy.

Plan has maybe 100 actives, 175 total participants, no lump sum option.

What happens when the plan terminates? Must participants who don't have the age and service as of the termination date be given the opportunity to "grow into" the subsidy, presumably through an annuity contract?

Are there any ways to get around this from the sponsor's perspective, in order to make the termination feasible?

One option would maybe be a lump sum? Are there any other options if the "grow into" opportunity needs to be protected, and the sponsor wishes to terminate the plan?

[davef]

Take a look at Rev. Rul. 85-6. It deals with terminating DB plans with subsidized early retirement provisions and related 411(d)(6) issues.

[david rigby]

See Reg 1.411)d-4 Q&A1.

You might also consider whether using the Rule of 90 in a temporary early retirement window would satisfy the issue.

[AndyH]

Thanks for the feeback. I read both cites. It is as we thought, a permanent "grow into" feature without an exit.

[Guest egrant]

If the subsidy is added to the plan as a new form of Early Retirement (as opposed to a temporary window), when the plan terminates, participants must be able to "age into" and "service into" the ER subsidy (unless at plan termination, those requirements are removed and everyone becomes eligible for the subsidy). Unfortunately, for active participants, this means the sponsor needs to stay in touch with the annuity provider to let them know if at ee's termination he/she met ER subsidy service reqts.

Then, when you add a lump sum at the time the plan terminates - it's a new option - if the sponsor doesn't want to have to pay extra for purchasing an annuity contract with a lump sum option, you can specify that the subsidy is NOT to be reflected in the new optional lump sum. This can be accomplished via careful wording of that new optional lump sum language - such as "one-time opportunity to elect to receive the Actuarial Equivalent value of their accrued benefit otherwise payable at NRA in a single lump sum, solely associated with the plan's termination". You should communicate to participants that the LS doesn't include the ER subsidy; if they want that, they have to retire.

[AndyH]

Thanks for the additional comments.

It appears to me that the main problem would be finding insurers willing to offer these contracts at reasonable cost.