Prototype 401(k) plan provides for several annuity forms of distribution as well as lump sums. Sponsor wants to terminate plan. Code section 401(k)(10(B) says distributions upon plan termination must be lump sum. How does this work if a participant elects an annuity? Can the plan not be terminated? Can the plan satisfy this requirement by purchasing an annuity contract for the participant?

I would think that you would purchase an annuity. I know that Section 402(d)(4)(A) states that a distribution of an annuity contract will be treated as a lump sum distribution.

A related question on this topic: what if the terminating 401(k) plan provides installments as an optional form of payment? This plan provides for "fixed period installments over a period of whole months which is not less than 60." If a participant elects that option, how can the plan terminate? Is there a way to work around this? Thanks for your help.

If any of the participants elect an annuity or installments, the plan can simply arrange these payments with an insurance company using the participant's account balance. The participant is effectively "paid out" as far as the plan is concerned.

Thank you, Mr. X. The insurer sponsoring the prototype confirmed they have an "installment annuity" product.

If a plan has optional forms of payment such as installment options, but no annuity options, the plan may be amended to eliminate all forms of payment other than the single sum, which may be distributed without participant consent. This option is available only if there is no other DC plan in the controlled group (except an ESOP). See Treas. Reg. Section 1.411(d)-4(B)(vi).

Thanks, Wessex, that's a good rule to keep in mind. Unfortunately, this plan also has annuity options (it's an insurance company prototype with about 9(!) different annuity forms.)

You are reguired to explain all the options - per the Treas. Regs. We have a place on our forms for the participant to direct us to the insurance company of their choice if they want an annuity type payment. Otherwise the annuity selection is a fiduciary act by the employer and you or your client should read all the DOL stuff on that point. I hope and believe that getting the insurance company selection from the participant is analogous to 404©limited protection for my client - maybe. Your insurance company prototype may have some restrictions in it, but my attitude is once I see lump sum as an option, the participant can do anything (distribution) he/she wants under the law and with any company. My experience is that no one will take an annuity if they can get cash or rollover to an IRA if this is explained in the distribution election forms.

[This message has been edited by Bill Berke (edited 06-14-2000).]