Purchasing an Annuity

One of our client’s is a doctor who sponsors a DB Plan for his medical practice.  The plan is not terminating and is not covered by the PBGC.  We are in the process of cashing out several terminated participants.  One of these former employees has a benefit worth much more than $7,000.  She is married and has received her distribution election forms.  However, she is not cooperating and will not return her forms.  In accordance with statute and with the plan document, the default form of benefit is a joint and survivor annuity.  We have checked with several insurance companies, all of whom offer the desired annuity.  However, every insurance company wants a signature from the participant.  This is a catch 22 because this participant is not cooperating.

⦁    Does anyone know of an insurance company that will provide an annuity for the benefit of a terminated participant without the signature of that participant?

⦁    I have heard that the PBGC now permits limited use of their Missing Participant Program for plans that are not covered by the PBGC.  This plan is not covered by the PBGC and this participant is not missing.  Does anyone have information or experience using the PBGC Missing Participant Program for this type of situation?

Thank you.

Michael P. Burkow, EA

401k America, Inc.
(909) 591-1724 X. 418
michael@401kamerica.com

Why/how is she eligible to be forced out?

And even if the plan permits a severed-from-employment participant to claim a distribution, does this plan in this participant's circumstances mandate an involuntary distribution?

You can't force the participant to receive payment until they hit MRD.  You also don't need to purchase an annuity as the plan can make the payments directly, but if the sponsor wants to de-risk and move the liability to someone else, the plan can purchase an annuity for terminated vested participants.  Many plans have "de-risked" and purchased annuities for some / all of their retired and/or terminated vested populations.  What you are looking for is called a "single premium annuity" and it it purchased by the plan sponsor, typically through a broker, but the sponsor can work directly with the carrier and save the broker's commission.  No participant signature is required. 

Since you have only one participant that you are trying to annuitize, there are probably only a few carriers that will be interested.  Try Mutual of Omaha, MIdland National, or OneAmerica.  They are generally the best players in the small market.   I can't give you direct contacts, but if you want to pay the broker's commission you can send me a DM and we can get you a quote.  

Also, the annuity will needs to provide all of the same rights and features the plan offers (early retirement, optional forms of payments, disability, etc.)  The cost is typically 5%-10% higher than the lump sum value, but will be based on the interest rates in effect at the time of purchase. 

Yes, if value of benefit exceeds $7,000 you cannot force out or force a lump sum. Some plans mandate commencement at normal retirement date, but most do not, so as stated above the person could defer benefits until RBD. Then, if still unresponsive, you can commence the benefit in the normal form - J&S if married, life annuity if not.

You could try to purchase a deferred annuity that provides all the plan's options (including lump sum) but it would be very expensive if you could even find an insurer, as these are full of too many uncertainties that insurance companies dislike. It would be easier (but not necessarily easy and still expensive) to buy an immediate annuity for the specific option elected by the participant, but having an unresponsive participant does not facilitate that.

Unless you're in the situation where this benefit must commence (upcoming RBD), I would just sit tight until you had to do something with this participant. You're not paying PBGC premiums, thankfully.