Takeover Amendments and Anti-Cutback Rules

Good afternoon,

In a takeover case, the employer would like to do the following in his new document:

1. Annuities are the normal form of benefit in the current 401(k) plan document.  The employer maintains that he did not know this, that nobody has ever been offered an annuity nor have they inquired about one, and certainly nobody has ever taken one.  He was genuinely shocked to hear that this provision is in is current document.  He maintains that they never had a Money Purchase Pension Plan, a Target Benefit Plan or any other plan at all besides the current one, which started life as a profit sharing plan in 1969 and eventually had 401(k) provisions added to it. The incoming account balance report does not have a source where MPP money or related rollovers are being tracked.  It would appear that there never was any reason to have annuities as the normal form of benefit.   He wants us to take out any reference to annuities and put in lump sum only.  

2. Normal retirement age has been plain age 65, and he wants us to change it to the statutory definition of age 65 or the completion of 5 years of service, whichever comes later.  

Does anybody see either of these changes to the document as a violation of anti-cutback rules?

Thank you for your thoughts.

15 minutes ago, ldr said:

Good afternoon,

In a takeover case, the employer would like to do the following in his new document:

1. Annuities are the normal form of benefit in the current 401(k) plan document.  The employer maintains that he did not know this, that nobody has ever been offered an annuity nor have they inquired about one, and certainly nobody has ever taken one.  He was genuinely shocked to hear that this provision is in is current document.  He maintains that they never had a Money Purchase Pension Plan, a Target Benefit Plan or any other plan at all besides the current one, which started life as a profit sharing plan in 1969 and eventually had 401(k) provisions added to it. The incoming account balance report does not have a source where MPP money or related rollovers are being tracked.  It would appear that there never was any reason to have annuities as the normal form of benefit.   He wants us to take out any reference to annuities and put in lump sum only.  

2. Normal retirement age has been plain age 65, and he wants us to change it to the statutory definition of age 65 or the completion of 5 years of service, whichever comes later.  

Does anybody see either of these changes to the document as a violation of anti-cutback rules?

Thank you for your thoughts.

ALL  of my plans have the J&S as the automatic form of distribution, but everyone waives it to get the lump sum distribution (except for 2 annuity purchases in over 35 years of doing this with thousands of distributions).  It's no big deal that he has that provision.  HOWEVER, the reason I do this is because if you don't, the spouse is the required beneficiary for 100% of the death benefit (instead of 50%). What's wrong with that? It disinherits the children of a prior marriage.  Had a take over client in today with a prototype 401(k) document that used the lump sun only, and it turns out it is his second marriage and he has children from the first and he was PO'd that no one ever discussed  this with him!  Just, FWIW.

Thanks, Larry. We never knew it could be worked that way.  We thought the only way to control the situation with the heirs was to explain that if participants wanted someone other than their current spouse to be their 100% beneficiary, then the current spouse would have to sign the waiver on the beneficiary form and they would have to get it notarized.  Then, the participant could leave any or all of it to his kids from a former marriage.  I have had a fair number of those cross my desk in my career.

If you put annuities as the normal form of benefit, don't you make your own life miserable with all the extra notices, potential benefit calculations, etc. that have to be given to the participant before he or she chooses the lump sum they were after in the first place?  Just asking.

Miserable?  Imagine the following situation: Participant takes the waiver form (in your first paragraph) to spouse, asking him/her to waive a portion in favor of Participant's children from prior marriage.  Spouse objects.  Now what?

The point Larry advocates is to make this automatic, avoiding the "miserable" embarrassment between spouses.

On 11/1/2019 at 5:27 PM, ldr said:

Thanks, Larry. We never knew it could be worked that way.  We thought the only way to control the situation with the heirs was to explain that if participants wanted someone other than their current spouse to be their 100% beneficiary, then the current spouse would have to sign the waiver on the beneficiary form and they would have to get it notarized.  Then, the participant could leave any or all of it to his kids from a former marriage.  I have had a fair number of those cross my desk in my career.

If you put annuities as the normal form of benefit, don't you make your own life miserable with all the extra notices, potential benefit calculations, etc. that have to be given to the participant before he or she chooses the lump sum they were after in the first place?  Just asking.

Not at all!  We automatically print out the necessary forms and notices that go with the distribution forms for when someone gets paid out.  It's all automated and actually trivial from an operations standpoint.

Thanks to both of you for your comments.  I bet our software would give us the possibility to do the forms and notices that go with annuity provisions and we just aren't aware of it.

I have worked in small shops all my life, and I would say that for at least the last 20 years, the various TPA owners have avoided annuities like the plague, retaining any mention of them only if old money purchase or target benefits had been rolled into the surviving 401(k) or profit sharing plan. And even then, they minimized the number of people subject to annuity provisions in any way possible.  The reasoning was a perception that annuities are confusing and hard to understand, nobody wants them in the first place, and the work required to notify participants about them is beyond tedious and burdensome.  It's interesting to hear your very different perspective on this.

To answer the original questions:  The 411(d)(6) regulations permit profit sharing sources to have the QJSA removed if the conditions of the regulations are met (sorry, I can't look up the exact cite). However, most plans that have a lump sum option will qualify. I strongly advise you to find the reg to confirm all conditions are met. This only works for non-pension sources - for eample, rollovers (including direct rollovers) from DB/MP plans can be made exempt from QJSA via an amendment because the QJSA was stripped when the distributed funds from the other plan were distributed from that other plan with spousal consent. However, direct transfers from DB/MP plans would cause the funds to retain their character as pension assets, and the QJSA would remain intact (and preapproved plans should so state). Most plans allow you to have QJSA to only the funds that need QJSA, if you like (then you have both sets of rules potentially applying to the same participant - so enjoy all those forms). If you amend to do this, you have the practical concerns expressed by the preceding commentators.

For the NRA, you need to protect age 65 as NRA for all funds accumulated through the later of the effective date of the adoption date of the amendment changing the NRA to a later time. For example, for amounts already accumulated, amounts fully vest (if not before) at exactly age 65, and only new funds vest (if not before) at the later of age 65+5. For some plans, there might be additional protections, such as the NRA in a pension plan, where you would need to actuarially adjust (for example) for early (pre-NRA) payment for each part of the accrued benefit, i.e., the part of the accrued benefit already accrued that is payable at the NRA of 65 and the part of the accrued benefit not yet accrued that will be adjusted from the NRA of 65+5. (This is not a complete list of potential issues.)

On 11/4/2019 at 12:02 PM, ldr said:

Thanks to both of you for your comments.  I bet our software would give us the possibility to do the forms and notices that go with annuity provisions and we just aren't aware of it.

I have worked in small shops all my life, and I would say that for at least the last 20 years, the various TPA owners have avoided annuities like the plague, retaining any mention of them only if old money purchase or target benefits had been rolled into the surviving 401(k) or profit sharing plan. And even then, they minimized the number of people subject to annuity provisions in any way possible.  The reasoning was a perception that annuities are confusing and hard to understand, nobody wants them in the first place, and the work required to notify participants about them is beyond tedious and burdensome.  It's interesting to hear your very different perspective on this.

Stick around here long enough and you will find that I have very different perspectives on most things pension related!  Your comment about your history on this issue is exactly what I would have expected; that's what makes my practice different than most others.  Frankly, we understand the details of the rules that apply to our business and my job is to protect my clients, not save five minutes administratively (I am also a notary and will happily notarize any J&S forms for clients if they want, but fully legally - they have to show up in my office with ID).  All those people who think annuities are a problem just don't know what the true situation is; it really is trivial once you are set up to handle it. Investment of a couple of hours is all it should take, and yes, almost all the software systems will prepare the forms. We use a separate legal document preparation system to prepare our distribution forms packages as we customize it so that we input the specifics and get the correct matching forms (like, over/under $5,000, with or without J&S (we have a couple only), age 70 1/2 issues for owners, etc.

@Doc Ument

Thanks for the reply.  After Larry's commentary about annuities not really being the boondoggle we thought they were, we will have to think about that one.  I would imagine that in all likelihood we will still go to lump sum only since there is no evidence that any MPP or TB money was ever involved, and we don't have any other plans in the house that have annuities, and the employer never even knew he was supposed to be offering them in the first place.

As for changing the definition of normal retirement age, for sure, we do not want to do separate tracking of benefits earned up until an amendment is passed and benefits earned post amendment.  If that's what would be entailed, then retirement age can just stay as plain old age 65 with no strings attached!  I suspected that might be an anti-cutback issue and you confirmed my suspicion.

The cite for eliminating optional forms of payment under a DC plan if certain conditions are met is 1.411(d)-4 Q&A 2 (e).