SECURE Act annuity portability

Forgive me if this has been covered.

The SECURE Act allows employees with 401(k) annuities the opportunity to preserve the annuity if the plan sponsor changes providers or eliminates the option altogether.

Employees can do a direct transfer to an IRA or another plan that accepts the annuity.  Or, it can do an in-kind distribution.

The first option would be tax-free, but what about the second?

Appreciate any insight.

The key to understanding the SECURE provision is that the employment-based retirement plan’s distribution is not a payment of money; it is a distribution of the contract, the one that is no longer the plan’s investment alternative.  (The plan should provide, or at least not preclude, a distribution by a delivery of the contract.)

Under Internal Revenue Code § 401(a)(38)(A)(ii), a plan doesn’t tax-disqualify because the plan allows “distributions of a lifetime income investment in the form of a qualified plan distribution annuity contract[.]”

“If a trust described in section 401(a) and exempt under section 501(a) purchases an annuity contract for an employee and distributes it [the annuity contract] to the employee in a year in which the trust is exempt, and the contract contains a cash surrender value which may be available to an employee by surrendering the contract, such cash surrender value will not be considered income to the employee unless and until the contract is surrendered.   . . . .”

26 C.F.R. § 1.402(a)-1(a)(2)

https://www.ecfr.gov/cgi-bin/text-idx?SID=85324826c4efd646e65f48bddbb1cf78&mc=true&node=se26.6.1_1402_2a_3_61&rgn=div8

Caution:  This discussion is limited to helping employee-benefits practitioners.  Anything I post here is not advice to anyone.