Rollover or Not

Coming from an insurance company pension department, if a profit sharing plan was funded with individual bundled annuity contracts and  a participant terminated employment and wanted to keep the same underlying investments, it was advised to change the ownership from the XYZ profit sharing plan to the individual and the beneficiary to a non-plan beneficiary. Plan does not require spousal  consent regardless of over $5000.

Insurance company, of course, told the plan trustee no 1099 required as this is a rollover, even though same contract.

We all know insurance company personnel can be and usually are giving out wrong information and IRS requires 1099s for any money leaving the plan, whether rolovrr or cash distribution with withholding.

Question, is this transaction truly a "rollover".

I am inclined toward a "yes" and the participant is due a 1099, code G for rollover.

Looks to me like it was just a distribution unless the owner is an IRA account.

Agreed. The fact that they said it IS a rollover and therefore no 1099 is required is pretty scary.

It's unclear from the prior comments, but if this is a "qualified plan distribution annuity" (QPDA) then no 1099-R reporting is required.  It's not a rollover distribution.  There is no reporting requirement in the 1099-R instructions or the Regs for transfers of assets from a retirement plan trust to an insurance company.  The insurance company must report distributions from the annuity on Form 1099-R.

Also, the Schedule H (form 5500) reporting for QDPAs also differs from rollovers and other distributions.  2e(1) is benefit payments to participants, including direct rollovers. 2e(2) is to insurance carriers for the provision of benefits. 

Hope this is helpful.  

A distribution from a Plan that would not be taxable would be if the annuity contract is "nontransferable".  A nontransferable annuity must not have any term that would allow the annuity to be transferred to another with the exception of a transfer to the issuer of the contract.  The payments themselves from the annuity would be taxable.  Using a nontransferable annuity is similar to transferring the funds directly to an IRA. 

On 3/24/2023 at 4:31 PM, AMDG said:

It's unclear from the prior comments, but if this is a "qualified plan distribution annuity" (QPDA) then no 1099-R reporting is required. 

That's a good point, and I almost said something to that effect. From the facts presented however, I don't think that's the case here.

Also, might this then be a distribution "in kind" which must be allowed by the plan document and an option available on a nondiscriminatory basis.

CuseFan:  Yes, this option would, or should, be available on a nondiscriminatory basis and subject to the terms of the Plan.  

"We all know insurance company personnel can be and usually are giving out wrong information and IRS requires 1099s for any money leaving the plan, whether rollover or cash distribution with withholding."  All I can add is that this is just one more reason to avoid insurance company products for pension, profit-sharing (401(k)), or deferred compensation of any sort.  This is based solely on my personal experience and is not professional advice.

In this case the insurance company appears to be correct.  The 1099 issued for the distribution, Box 7 for the distribution from a Plan, G for the direct rollover (the nontransferable annuity) and 2a no tax.  My experience, insurance company products or not...it depends.

Curious as to how the insurance company is correct? The OP said the insurance company said no 1099 was needed. I'm not commenting on the taxability, or lack thereof, but regardless of whether you believe it is a rollover or a taxable distribution, 1099 still needed. Perhaps by "insurance company" OP meant an agent, who might not know beans about this stuff?

I misread the original post, it is needed.

Here is an article going back in time regarding Qualified Plan Distribution Annuities.  I highlighted some items related to this discussion (starting on page 10).

As I understand it, a plan can allow the participant can ask the plan to purchase a QPDA and have that QPDA distributed to the participant when the participant's benefits become payable from the plan.  The plan document is not required to have specific language allowing for the distribution of a QPDA and can be available as long as the document allows for a lump sum distribution that is not limited to a cash distribution. 

The QPDA is distributed to the participant as an in-kind distribution.  This distribution is not a rollover and is not reported on a 1099-R but rather is a "payment of the balance to the credit of the employee for purposes of 402(c)."

The QPDA is subject to qualified plan rules such as direct rollovers, qualified plan RMD rules, 20% default withholding and more.

QPDAs have been around a long time, and they recently received some recognition in the SECURE Act Portability of Lifetime Income Options (Section 109).

I must admit I have had no experience with QPDAs.  It's been said and hopefully is true that learning and growing as we age increases our lifespans.

NYU-BenefitsReview.pdf

Thanks for the info. I didn't realize insurance companies still did this. "Back in the day" - about 30+years ago, (I'm so OLD!!!) it was fairly common. But anything I've ever seen "recently" - which is still going back many years, the individual annuities were "re-registered" as IRA's - assigned to the former employee, with some special language which might well have varied by company. Fortunately I never see this stuff. The idea of annuities making a comeback as funding vehicles in individually directed DC plans scares the Hell out of me from an administrative viewpoint.

Belgarath:  Yes, some insurance carriers have these annuities and some add an endorsement to an existing annuity to comply with IRC Section 401(g) and Treas. Reg. Section 1.401-9.  It is a strategy and to avoid the tax on the distribution and the extra expense of setting up an IRA, some advisors use with retirement planning, a "flooring strategy".  With this strategy the annuity is covering the fixed expenses of the client and other investments cover discretionary needs and wants.  Also, some advisors use a strategy during the accumulation years, similar to rebalancing, but funds are rebalanced to the annuity.  The purpose is to provide a pension like benefit at retirement that is not subject to market volatility.  You give up any upside potential but you protect any downside loss.  Administratively, there are fewer administrators out there than there were in the "old days", agreed.

Let me add to this as the plan is now terminating 12/31/24.  Notices have been sent out to the participants.  Rach has completed an change of ownership form indicating the contract will be in essence "rolled over" from the profit sharing plan to an IRA in the participant's name.

This is the way Equitable does it - I'm not agreeing, just attempting yo CYA of the trustees and myself as the TPA.

As far as I'm concerned, this is a rollover as the contracts are leaving the plan, such that the plan will eventually ave $0