Plan Termination

If a defined benefit plan offers lump sum distributions upon plan termination, does it also have to offer an immediate annuity under the J&S rules?

For example, a participant is age 45 and not otherwise eligible for a distribution until age 65.  Upon plan termination, the plan is amended to offer lump sums.  Does the Plan also have to offer this participant an immediate annuity?

yes

Read the document.  It will already confirm the YES answer, with the caveat that a LS less than $5000 (or some other lesser amount defined in the document) is not subject to this J&S requirement.

Some plan documents do not contain the proper language regarding how to determine the immediate annuity or what forms of payment are offered, and therefore, if you are amending the plan to offer lump sums upon termination, you will also need to address how to determine the immediate annuity.  Many times early retirement factors only go to the earliest retirement age (typically age 55).  If you are paying a LS to someone younger than the earliest retirement age, your amendment should also address how that annuity benefit will be determined, and what optional forms of payment will be offered.  You at least need to provide the QJSA and QOSA.

Thanks everyone.  That has been my understanding.  Effen, thanks for the point on the document. 

Effen is absolutely correct. If plan did not have immediate lump sum already, you need to add immediate annuity along with it. As noted, you need to state how that is valued - do you use ER factors to ER age and then actuarially reduce thereafter or just actuarially reduce if not ER eligible? We usually do the latter but some clients do chose the former.

Also, be careful how you amend for the lump sum as you won't want a general lump sum feature (if you don't already have one) that needs to be included in a deferred annuity contract - makes placing/pricing contracts more challenging. 

To elaborate, you would need to offer the immediate life annuity for a single participant and both the qualified optional survivor annuity options to a married participant if lump sums valued at more than the cash out amount.  You want to ensure you state how lump sums are calculated and actuarial factors. We generally use the actuarial equivalent of the benefit payable at normal retirement date. If you allow for enhancements for those eligible for early retirement subsidies to be taken into account, the lump sums amounts likely will increase.