Lump Sum Window

When offering a lump sum window, I understand that a sponsor is required to also offer eligible participants an immediate annuity that satisfies the QJSA rules.  However, I generally see lump sum window designs that limit the annuity options for participants who have not yet attained early retirement age to the QJSA (or QOSA), while providing the full suite of optional forms of benefits to those over early retirement age.  Is that legally required (perhaps based upon the anti-cutback rules), or simply a design choice?  Could all lump sum participants (who are not otherwise eligible for a distribution) be limited to the QJSA/QOSA?

4 hours ago, BTG said:

providing the full suite of optional forms of benefits to those over early retirement age.  Is that legally required (perhaps based upon the anti-cutback rules), or simply a design choice?  Could all lump sum participants (who are not otherwise eligible for a distribution) be limited

Yes, required. If someone is early retirement eligible then they have all other distribution options available to them already. By giving them a (temporary) lump sum option I don't see how you can take away any of their annuity options. If someone is not eligible for any distribution other than under the window then yes, you can offer them only the QJSA/normal form QOSA.

Thanks, @CuseFando you have a cite or any authority for that, by chance?

Also, to be clear, I'm not suggesting completely eliminating the other optional forms of distribution.  The participant would still be eligible for them when they eventually separate.  I'm wondering about the active employees who would not be eligible for a distribution at all, but for the lump sum window.  I know 1.417(e)-1(b)(1) requires the QJSA, but I haven't been able to find anything that would require the other forms to be offered to such participants.

Thank you!

Active employees would NOT be eligible for the lump sum window.  In order to be eligible for a lump sum, you must first be eligible for a distribution.  The participant either needs to be separated from service, or be otherwise eligible for an in-service distribution.

1 minute ago, Effen said:

Active employees would NOT be eligible for the lump sum window.  In order to be eligible for a lump sum, you must first be eligible for a distribution.  The participant either needs to be separated from service, or be otherwise eligible for an in-service distribution.

 

Effen, I'm confused by your premise.  Why couldn't a plan be amended to permit in-service distribution as part of a lump sum window?  This is standard practice in the plan termination context.

It could, but in order to be eligible for an in-service distribution, the participant would still need to be at least 59.5.  Your comment didn't specify the age, so I assumed you were talking about ALL actives.  

I would argue that as soon as you add the in-service provision, those participants who are eligible for an in-service distribution automatically become eligible for all optional forms of payment.  It isn't like the DVs who are not otherwise eligible for a monthly benefit.  

Sorry, I should have specified in my original post that this is in the context of plan termination so the prohibition on in-service distributions prior to age 59.5 does not apply.  I am indeed talking about all actives (or the vast majority of them anyway).

So, let's assume the plan does not currently provide for in-service distributions, and has a NRA of 65 and an ERA of 55 with 10 years of service.  And let's say for example that I have an unmarried 60-year-old active employee who is early retirement eligible, and could terminate and elect either a life annuity or a life annuity with 10 years certain.  If I offer that participant a current lump sum in connection with plan termination, 1.417(e)-1(b)(1) would say that I also have to offer him/her an immediate life annuity.  What requires me to also offer the immediate life annuity with 10 years certain?  If the participant does not take the lump sum (or immediate life annuity), he/she would get a deferred annuity contract that protects the life annuity with 10 years certain.  Am I missing something?

I appreciate the feedback!

Yes, that clarifies things.  A LS window in connection with a PT, is a little different.  For a PT, you need to offer all available options to anyone eligible to retire, including actives.  "in-service" language isn't really important, however it might come in to play for a deferred annuity purchase - but most carriers seem to just ignore it.  

Assuming the LS option didn't previously exist, you are wise to make it a one time option only available in connection with the plan's termination.  That way if anyone doesn't elect it, you will not need to include it as an option when you purchase annuities. 

All of this needs to be specified in the termination amendment.

You haven't mentioned retirees.  Are you planning to also offer them a LS?  If so, you will also need to offer them all available options as it would be a new "annuity starting date".  Some people argue this point, but my experience is that most attorneys agree that all options need to be offered.

IMHO, the phrase "lump sum window" should not be used in the context of a plan termination.

3 hours ago, Effen said:

For a PT, you need to offer all available options to anyone eligible to retire, including actives. 

Effen, this is exactly the point I'm wondering about.  Can you provide any cites or authority for this?  I understand the logic, but I haven't been able to put my finger on anything requiring it.

3 hours ago, Effen said:

You haven't mentioned retirees.  Are you planning to also offer them a LS?  If so, you will also need to offer them all available options as it would be a new "annuity starting date".  Some people argue this point, but my experience is that most attorneys agree that all options need to be offered.

Those who are currently in pay status would not be eligible for a LS and would continue to receive their monthly benefit in the elected form following transfer to the insurance company. 

3 hours ago, david rigby said:

"lump sum window" should not be used in the context of a plan termination

agree completely.

43 minutes ago, CuseFan said:

agree completely.

Curious what the objection is to the use of this terminology?  I see it used routinely.

'Can you provide any cites or authority for this? ' I am fairly certain you don't need to look any further than the plan document.  It is a distributable event and they are eligible to retire, why do you think they don't need to be given all the options?

FWIW, I also agree with CuseFan and Dave - "lump sum window" is generally not a term used to describe what you are doing.  A "lump sum window" is typically offered in a ongoing plan as a way to derisk the plan of DVs and/or retirees. What you are doing is offering lump sums in conjunction with a plan's termination.   I know, semantics.    

Windows close.  With a plan termination, everyone's getting paid out.

52 minutes ago, Bri said:

Windows close.  With a plan termination, everyone's getting paid out.

Lump sum windows in connection with a plan termination close as well.  If the participants don't elect a lump sum during the window, they won't have the option later.  They'll get an annuity contract from an insurance company.

Gotcha - I wouldn't have thought to close the window at a time specifically earlier than those final annuity purchases.  But yeah, you don't want someone showing up at the office with LS election paperwork the day you're trying to transfer the funds for the annuities!

5 hours ago, Bri said:

Windows close.

And can later be re-opened, unless the house is torn down (plan termination). Just a difference of opinion on the semantics.