We are terminating a DB plan and are making final distributions. Participants were provided all benefit options including a lump sum distribution. There are several participants who have not returned their election forms (not missing participants) and the plan will purchase annuity contracts for their benefits.

1. Is a deferred annuity purchased for the accrued benefit payable at normal retirement, or an immediate annuity?

2. If the plan should purchase the immediate benefit and it is very small and too small to purchase, then what?

3. We believe a 50% J&S benefit is automatically provided for a married participant.

4. The plan provides automatic cashout only for distributions less than $1,000. There are several participants whose distribution amounts are less than $5,000. What are the alternatives for these participants as I anticipate that it will be very diificult or impossible to purchase annuities for these benefits?

Thank you for your thoughts and comments.

1. The annuity should preserve whatever benefits, rights, and features the Plan has.
2. Amend the Plan to offer lump sum payment.
3. Make sure the Plan offers the 75% QOSA.
4. Amend the Plan to allow for voluntary lump sum payment. You may wish first to discuss with the broker who will procure annuity bids to ascertain minimum size. It may be stated as minimum premium, minimum monthly pension, or both. Then, amend the Plan to allow for voluntary lump sum payment.

Note, you could amend plan for automatic cashout of $5,000 or less (I don't believe the $5,000 is protected). Only issue then would be setting up an IRA for someone who fails to make an election.

If the number of nonresponders is small, I would send the non-responders another letter (in a form of letter they'll notice (and not toss as assumed junk mail), such as Fed Ex or Certified Mail). Email also can help.

I generally agree with Andy's responses -- the basic rule is that the participants must be offered the same options after the plan is terminated as they had before plan termination. And, if participants have the right to an immediate lump sum (other than cash-outs), then they must be offered immediate annuities. Regarding the 50% J&S question - -doesn't the plan already answer whether the spousal default is the 50% (or 100%) J&S? How about plan practice as additional support, and the Summary Plan Description? Finally, if someone doesn't respond, I think if you follow the PBGC's missing participant rules, then you could probably turn over the participant funds for those people to the PBGC (using Sch MP) rather than purchasing annuities for them.

Unfortunately, the PBGC missing participant program specifically exlcudes non-responders:

Q: May I use PBGC's Missing Participants Program for a participant whose whereabouts are known but who refuses to return the election forms?

A: No. You must purchase an annuity for the participant in order to complete the termination. The annuity contract must preserve all of the participant’s benefit options.

Essentially, the Plan Sponsor must purchase an annuity for non-responders whose lump sum exceeds the non-consentual lump sum limit. If no annuity can be purchased, the Plan Sponsor is held held hostage. There are other postings on this particular issue with no particular relief.

There may be some other issues here.
- First, Andy is absolutely correct to recommend the $5K automatic cashout limit.
- Second, no matter how you try to buy an annuity covering all the plan provisions, this will be irrelevant if you can't find an insurance carrier to sell it to you. Generally, they don't like to sell deferred annuities. The alternative is to buy an immediate annuity. In that case, IMHO, the only choice is the plan's defined QJSA. As suggested by Kabert, when you send another letter, describe this process, and it may help get the participant to return the election form.

Thanks for the input. We will attempt to purchase immediate annuities for those whose PV exceeds $5,000 and buy 50% J&S benefits for married participants. In addition, we will amend the plan to provide nonconsensual lump sums up to $5,000 and make those distributions to default IRAs.

I appreciate the advice.

I am not sure you can force immediate annuities to those who have not elected that option. Participants always have the right to defer receipt of their benefits until at least NRD.

Agree

Not so fast. This plan is terminating. The non-responders cannot "hold hostage" the completion of the termination. If they do not respond, and you cannot purchase a deferred annuity, what's next?

You may need to argue your case to both the IRS and PBGC, neither of who is likely to chant anything other than the mantre, "buy an annuity."

Why not? I get regular soliciations from a company that want's to know if I have any clients with terminating plans so they give quotes on deferred annuities (group or single).

First, I would make every effort to contact them to let them know that failure to send in signed election form will result in an annuity purchase.

If there's still no response, a deferred annuity should be purchased. But it must offer all of the benefit options that the DB plan had offered. It's complicated, but there are companies that specialize in these things. They gather all of the required information about benefit options, and then quote a premium.

Suppose the "missing participant" is not missing, only a non-responder, which means you can't use the PBGC Missing Participant Program, and the amount is less than $200, which means you can't get an annuity. In "the good old days" such an amount would have simply been put into a money market in an IRA, with a letter to that effect to the non-responder. Would such a thing still wash, or must the employer keep the plan alive forever for $200 simply because they can't meet the only two options the PBGC provides?

Does the plan have the (common) language for automatic payouts when less than $5K?

Yes.