The seemingly obscure issue of when a payment from an annuity contract purchased under a Defined Contribution plan is considered to be a "payment from an annuity" is actually one of the most pressing tax issues that needs to be resolved in the area of DC annuitization.  Resolution of this issue determines when spousal consent rules apply and notices given.  What makes it so important to have a clear set of spousal rights rules is that the timing of the application some of the actuarial rules used in determining the level of benefit under certain kinds of products can be affected and, more universally, the actual administration of the spousal consent rules can be challenging in the best of worlds.

At issue, again, in the latest PLR from the IRS is how the spousal consent rules apply to a "hybrid" annuity of the sort which is being widely designed in the 401(k) marketplace. These hybrid products guarantee lifetime income while also maintaining a participant account account balance under which the participant remains invested in equities. These types of products tend to have complex designs, but they basically permit participants to withdraw amounts from their account balances throughout their lifetime and provide "longevity insurance" payments at a guaranteed level once the account balances reach zero or the participant reaches a certain age.  

Simply put, the IRS was asked if electing and beginning a flow of withdrawals from an account balance at actuarially determined levels, where the actual "insurance" does not kick in for a number of years, constitutes "payment as an annuity" (I won’t go into here the Sect 417 differences between "payments as an annuity" and "payments NOT as an annuity").

The IRS first answered that question late in 2009 in PLR 200951039.  It ruled that the that the initial election from this sort of product was legally two different elections: it was first an election to take “payments as an annuity” at that later date, when "insurance payments" arising from the longevity insurance kicked in, which then triggers application of the 417 rules. Secondly, for any payment prior to that "longevity insurance" payment start date, it was an election to take “payments not as an annuity.” 

In the new PLR, 201048044, the IRS apparently shifted from this initial position.  A vendor introduced a new product for the 401(k) marketplace which is (from a strictly legal view) strikingly similar in key respects to the product described in In the prior PLR.  The taxpayer asked for guidance on whether the initial payments under the scenario described above would be considered "payment as annuity."

Surprisingly, and in contradiction to its earlier ruling, the IRS answered that it would be.The new PLR ruled that the initial distribution election characterizes ALL periodic payments from the contract as “payments as annuity,” beginning with the first payment. This is so even though all the payments are withdrawals from an account balance, reducing that account balance. 

Lets look at the details to see why this appears to be a shift in the IRS position.

In the new PLR, the product is a specially designed “”Guaranteed Lifetime Withdrawal Benefit,” or GLWB with a number of unique design elements, held by a plan. The product in the prior PLR was a unique version of variable annuitization, distributed from a plan. The two products, however, share common design elements  which are determinative of how to apply the "payment as an annuity" rules:

-Participant DC account balances are deposited in equity based, insurance pooled separate accounts, which balances will vary with investment performance.

-The participants elect to begin taking a monthly payment at time of retirement. Positive investment performance serves to increase the monthly benefit over time, investment losses serve to decrease the benefit. Under both products, there is a guarantee base under which the benefit will never go below, in spite of investment losses.

-Payments reduce the account balance.

-The amount of the monthly withdrawals are actuarially determined. Under the product in the prior PLR, the monthly payment is calculated based on life expectancy. In the product in the new PLR, the base payment is calculated using an average calculation from a pool of insurers.

-The death benefit while there is an account balance equals the account balance.

-The participant can withdraw all or any portion of the account balance at any time. Under the product in the prior PLR, this right ceases at the earlier of a stated age or when the account balance reaches zero. Under the product in the new PLR, that right ceases at the time the account balance becomes zero.

-The insurance company continues to pay the elected monthly benefit for the rest of the participant’s life, even after the account balance reaches zero (thought he monthly benefit is ultimately reduced by early withdrawals). This is the true income guarantee.

Of the two different positions taken by the IRS, one position is not inherently better than the other. They both have their strengths and their weaknesses (which I will not go into here). Whether one is better suited than the other is so much dependent on the specific product design and the administration and system capabilities of the insurer. This new PLR is actually more consistent with the tax treatment of similar types of payments of "non-qualified" annuities (that is, annuities not sold in relation to qualified plans). 

The problem is that the differences in these two rulings are difficult to reconcile, and muddies the waters for designing DC annuitization programs. There are a number of important differences between the products described in the two PLRs, but none of them appear to impact the determination of when payments should be characterized as "payment as an annuity." If there is a critical, minute fact difference upon which the the new rule was based, it would be helpful for the IRS to highlight it so we can use it in our design efforts  I suspect, however,  that the difference lies in process: the request for this new PLR was put in much different terms than the first, and the PLR was issued out of a different IRS group than the first.

In any event, we now have contradictory rulings. While the IRS has firmed up the position that payments from these sorts of hybrid products are (at some time or another) "payments as an annuity" subject to 417, it left us with confusion as to when that status actually occurs. An opportunity  to settle the issue has been missed. Instead, we are left with a new, self-constructed bump in the road for DC annuities- without any particular policy consideration serving as its basis. 

 I have finally been putting together the pieces on how all of these new DOL transparency rules will affect 403(b) plans. It is, in many ways, surprising. I’m not quite sure its even possible for many 403(b) plans to actually comply with key elements of the new rules, but at east we have some time to work on it.

I will be doing a free  webinar/overview of the 403(b) impact  of the 408b2 and the participant disclosure  on Tuesday, November 23 at noon ET, as part of  The Standard’s "Building Your Business" series for advisors (click "webinar/overview" for instructions). If you miss it, you should be able to listen to it at a later date as well. 

Hope you have a chance to listen in.

 

 

Much has been written about the SEC’s proposed changes to the mutual fund 12b-1 rules. The proposed rules have caused quite a stir in the retirement plan world, as so much of the costs of plan administration and distribution are funded by these arrangements. 
 
What is being overlooked, however, is a much more disturbing and fundamental problem with the proposed change: the rules actually treat 401(k) plan participants as  “shareholders” under the securities laws, instead of the plan itself. I say “disturbing” because the SEC, though acting with laudable intent, is treading into waters with which its staff has little familiarity and virtually no expertise.  Treating the participant instead of the Plan as the shareholder (besides being a legally tenuous position) will inevitably lead to confusion, expense and, ultimately, less protection of plan participants. As demonstrated by the SEC’s similar foray with its “Rule 22c2” which regulated excess trading in mutual funds (including in 401k plans,) these good-meaning SEC efforts cause tremendous expenditures with ineffective compliance “return.” 
 
This is how it is works under the 12b-1 rule: the SEC’s 12b-1 rule change is actually two changes. It proposes a reduction in the 12b-1 marketing fee, while permitting an increase in the sales load fees under Rule 6c-10. The economic question which everyone is properly asking is whether or not those new “sales load” rules will accommodate paying for things for which retirement plans use 12b-1 fees now.  
 
But in making the transition from 12b-1 to 6c-10, the SEC is requiring that the fees charged to each “shareholder account” be individually measured to make sure excessive fees do not end up being charged. This, in concept, is a great idea. In getting there, however, the SEC is not imposing the rule on the true owners of the shares (the 401(k) trustee). Instead, they are requiring that the Plan –as something it calls the “financial intermediary”-track the impact of these changes at the individual participant level.  The severe administrative burden this imposes is well described by ASPPA and Spark in their comment letters. 
 
Though I am not a securities lawyer, it seems that the SEC has taken a mistaken view in seeing the 401k Plan only as an intermediary, not as the ultimate owner of the mutual fund share. Claiming the plan is only something called an  “omnibus account,” where the true owner of the shares is the 401(k) participant, ultimately leads to the conclusion that 401(k) participants should be treated like 403(b) participants. The result is that all shareholder rights (including proxy voting, prospectus delivery and the like) must be passed through to 401k participants.
 
There are a couple of problems with the SEC position. First, plan participants have interests in the plan (which are actually securities under securities law, though they usually don’t have to be registered), and this is what the SEC can regulate. Participants do not have anything but a beneficial interest in the accounts holding the mutual fund shares.  Secondly, plans are not the typical “omnibus accounts” of the sort held by brokers for their customers. It has been the long established position of the DOL that the Plan owns the shares; the fiduciary is held accountable for the selection of them; and the fiduciary can force participants out of any mutual fund that is inappropriate. Many plans only have unit accounting of the comingled funds, not share accounting. Plan participants have no right to order a distribution of the shares in their names, as they do in a typical omnibus account.  In short, these are NOT the characterizations of an omnibus account.
 
All of this is not to say that the SEC isn’t doing the right thing. It’s just not doing it rightly. 
 

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Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   


 

 

The question of what the appropriate fiduciary standard should be in assessing the insurer insolvency risk when purchasing annuities by defined contribution plans continues to be a tough one.

It is also one of the  critical issues to be resolved if the efforts to encourage lifetime income from these plans is to be successful.  The recent  Lifetime Income Hearings  hosted jointly by the IRS and DOL made it clear that resolving this issue, together with portability, participant education and transparency, all need to be effectively addressed over time if there is to be widespread acceptance of DC annuitization.

I testified at those hearings, being privileged to be on the same panel as the distinguished and entertaining Professor Shlomo Bernatzi and Ben Yahr.  One of the two issues of which I spoke was the insurer solvency fiduciary issue.

A number of witnesses at the hearing testified to what I hear regularly from financial advisors as well:  plan fiduciaries don’t want to be sued 15 years from now if an insurance company which issued annuity products  chosen for the plan’s distribution annuities became insolvent. One of the sources for this problem is with the language that the DOL has used in its fiduciary safe harbor, which requires the fiduciary to

‘"appropriately conclude(s) that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract…."

It is understandable that commentators and advisors who look at the above standard will take pause: If you’re a fiduciary, this is pretty daunting stuff.  Without a crystal ball, how in the world can you conclude that an insurance company will be here 15 or 20 years hence?  The standard is generally being read as effectively prohibiting a fiduciary from choosing an insurance carrier, because there is no fiduciary which can foretell the future. 

I suggest that no fiduciary standard can require a conclusive prediction of the future, and that it is probably even a misapplication of the safe harbor to read it that way. The ERISA standard is not prescience, but prudence:

"with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like characterr and with like aims."

"Wizardry," is not specifically required.

But the pooling of longevity  risk (such as found in annuities) and mortality risk (such as found in life insurance) are important societal functions. No individual can-or should- solely bear the risk arising from the insolvency of the entity pooling those risks. The States have all recognized this, and the critical need of risk pooling, and have long sought to address, manage and regulate this risk. In each of the states is a substantial and integrated regulatory scheme which governs insurance company investments, reserving, contracts and sales practices. And at the tail end of it all is the guarantee associations, ultimately based on the ability to assess healthy insurers for the insolvency risk.

These state based systems can be flawed in some fundamental ways but, for now it is our "circumstances then prevailing."  Assessments based upon a biennial review, and guarantees based on assessments at the time of failure, can cause heartburn. But  It is all we have. The baby may be ugly, but the baby’s ours, as they say.

Rating agencies, as flawed as they may be, may also help. They provide a good measure of current financial health. These measures provide a much more current assessments than provided by  the state’s system’s biennial review. But the rating agencies own no crystal bell, either. After all, Executive Life had a very high rating when it collapsed. And do not forget the potential issue of rating agency bias.

So what should a fiduciary do? 

Annuities have been being purchased by plans for a very long time. Are these, and every fiduciary choosing annuities at risk? Not necessarily so.

There are a number of different things a fiduciary can do. As an example,  I suggest that the  following acts by a fiduciary could demonstrate prudence which would provide protection:

  1. Become familiar with their and their participants rights under state insurance solvency rules, should the chosen carrier become insolvent.
  2. Commit, perhaps by way of the plan’s Investment Policy Statement, to represent and assert participant claims upon insurer insolvency.
  3. Review insurer ratings, and choose only those companies on currently sound financial footings (note, this would not require taking only those with the highest rating; many of the ratings below the highest represent soundness); and
  4. When reviewing the terms of the annuity, flush things out to see if there is reason to question an insurer’s solvency. So, for example, if an annuity is extraordinarily inexpensive or paying too high of a crediting rate on its accounts, the fiduciary needs to look further. If its too good to be true (such as in the Executive Life offerings) there is a duty to explore.

There are a several other acts which could demonstrate prudence, this is only one set which may work. 

So what should the DOL do?

It needs to separate "future state" from "circumstances now prevailing." Given the flawed system we have, a new, more robust, uniform and transparent system of guarantees need to be established. But while such a system is being debated, it needs to expressly recognize that fiduciaries should be able to rely upon what we now have. I know DOL staff recognizes there is no crystal ball, and that it would be silly to think that the safe harbor requires such. But the language of the safe harbor is causing great discomfort, and a slight modification to recognize that "no prescience is required" would go a long way.

 

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Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   


 

 

 

 

 

 

 

 As we continue to dig into the weeds in the 403(b) world, particularly through this difficult audit season, we continue to find more and more of those "unintended consequences" of the application of the 403(b) rules.

The latest in this line lies the manner in which the regs apply the universal eligibility rule to the collectively bargained group. Attempting to comply with this rule could cause an an employer to engage in an unfair labor practice where a recalcitrant union is involved.

You see, unlike the 401(a) rules which allow for the exclusion of collectively bargained groups from many of the key testing rules, 403(b) itself does not.  IRS Notice 89-23 was written to address one of the key impacts of that problem, and had permitted employers to exclude employees from the universal eligibility rule whose retirement plans were subject to collective bargaining.

The new 403(b)  regulations, however, generally revoked  89-23 and that exclusion, and required 403(b) plan sponsors to cover collectively bargained employees as part of the universal eligibility rule.  The reg writers recognized some of the transition problems this would cause, and permitted the exclusion through:

"the later of (i) the first day of the first taxable year that begins after December 31, 2008, or (ii) the earlier of (I) the date that such agreement terminates (determined without regard to any extension thereof after July 26, 2007) or (II) July 26, 2010."

The reg, however, ignored a reality in union relations with companies: those relations are often not very smooth.  What happens if the union has not agreed to a 403(b) plan? This can (and does!) happen for a number of reasons. These include things like  poor employer/union relations; it could be seen an interfering with an important priority of the union or the employer; and  questions could arise over control over or design of the program; and the like.  An employer, I’ve been told by a number of labor lawyers, has no right to unilaterally impose a 403(b) program on a unionized group even where it is already being offered to the non-unionized workforce.

So July 26, 2010 has now come and gone, which means that employees covered by a collectively bargained agreement who are employed by an employer who sponsors a 403(b) plan now must be covered by the plan-even if the union has not agreed to this arrangement.This really leaves the employer with limited options, particularly if the union relations are sour: seek to impose the plan on the union, though it may result in an unfair labor practice charge; or terminate the existing plan covering non-unionized employees.  Neither of these options are very attractive.

I would hope that the IRS, an audit, would recognize this problem where there has been an impasse in negotiating these plans.

403(b)plans have a very long history and were well ingrained into a host of different state and federal laws which have over time accommodated those programs. We will likely continue to have to work with the fallout from the failure to recognize those long-established "accommodate practices" for a number of years to come. I really think that the takeaway is that, when crafting rules to address specific compliance concerns, care be taken to draft rules to address those concerns, rather imposing rules in a new and broad brush.

 How, one may legitimately ask, can anyone possibly write anything that makes any sense with a title like the one I’ve given this blog?

Easily, is my answer, as as long as one accepts the fact that our world of retirement plans and rules is not so limited as it seems at first glance, and that what we do is actually a critical component of a well functioning and relatively fair (as far as it goes…) society.  It necessarily encompass broad concepts outside of narrowly constricted regulatory compliance-even concepts raised in science fiction classics. 

I have had the pleasure of re-reading one of my all-time favorite science fiction novels, "The End of Eternity," by Isaac Asimov. Written in 1955, its a story of the "Eternals" who travel through a sort of time elevator. These Eternals time traveled in order to change events at some point in time in order to prevent major destruction (such as a nuclear holocaust) at some time in the future. It is based on the same premise as Malcolm Gladwell’s book "The Tipping Point", where seemingly small events can have significant future impact .

Harlan,  the main character in Asimov’s novel, was one of these "Eternals." He was instructed by the Computer of the need to travel into time and cause a malfunction in a spaceship which would kill the 12 people on that ship.  This was needed in order to prevent an earthwide catastrophe a few centuries later. Harlan struggled with this order and, through mathematical algorithms, determined that merely moving a canister on that same ship from one location to another would have the same affect on the future. Asimov labeled this the "Minimum Necessary Change," or "M.N.C."

"M.N.C." A concept which legislators and regulators often overlook when developing retirement plan rules (note I said "often," as there are some fine examples of MNC in the regulatory lore). It is the "Minimum Necessary Change" approach which I would advocate when approaching the DC annutization issue.

A prime candidate for MNC would be the seemingly intractable issue of portability: how do you allow a person to purchase lifetime guarantees in a DC plan, where the plan may want to change insurance vendors; where the employee changes employers; or when the plan terminates?

The solution for the government regulators may be to actually do as little as possible, and let those who know how to create these product figure it out. For example, the regulations could require (under both ERISA and the Code, let’s not make the mistake again of making it just an ERISA rule) any company wishing to sell lifetime guarantees to a plan to provide a portability solution-such as the ability to distribute the guarantee as part of a contract to the individual.  This is not a new issue for insurers, for example, as they have addressed this one in the past with the ultimate portable product: the individual 403(b) contract. Yes, there would be costs related to doing this, but this would be taken into account in the pricing of the product to the plan. A sort of classic "internalization of costs" of which economists speak.

These "distributed annuities" are already permitted by the IRS, and a legislative rule change may be necessary to permit the in service distribution of the contract, and the manner in which they would need to be reported (perhaps by the issuing company instead of the plan).  But, as under existing law, the issuer becomes legal plan administrator of the contract, charged with making sure the "distributed annuity rules" are followed.  

Sound complicated, and nowhere near a "MNC"? Not really. Making something like this work requires insurers and regulators to "dust off" well established rules, procedures and practices which have been in place for 90 years and which were particularly effective in the 403(b) marketplace. We do NOT need to create something out of "whole cloth." 

Or, as is often said, "what is old is new again"……

 

 

 

Lurking darkly in the background behind all the recent discussions of fee disclosure and how the prohibited transaction rules apply under 408(b)(2), is something most of us in the benefits world typically pay little attention to: the U.S. Criminal Code.

We all have a general knowledge that kickbacks and racketeering schemes of any sort are illegal.  But many do not realize that there is a specific "anti-kickback" rule applying to ERISA plans that is NOT found in ERISA, but instead under criminal law.  I invite you to read the following. I rarely cite the entire section of any statute, but the language of this one is so striking (and so unfamiliar to most of us, and not referenced in most benefits books), I thought it would provide useful reading. This section, by the way, only applies to ERISA plans: 

18 USC §1954. Offer, acceptance, or solicitation to influence operations of employee benefit plan

 

Whoever being—

(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or

(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or

(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or

(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan

receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both:

Provided, That this section shall not prohibit the payment to or acceptance by any person of bona fide salary, compensation, or other payments made for goods or facilities actually furnished or for services actually performed in the regular course of his duties as such person, administrator, officer, trustee, custodian, counsel, agent, or employee of such plan, employer, employee organization, or organization providing benefit plan services to such plan. 

The language of the statute is broad, and looks at first glance to be able to cover a number of poorly designed compensation schemes or service arrangements. We all know that doing something as foolish as buying a plan sponsor a car in order to keep its 401(k) business would clearly step over the line. But there some other, and familiar, arrangements which could raise some issues.

Take, for example, a sales rep which has no service agreement with a plan and who is compensated solely by commissions. Let us say this rep gets word that a 401(k) client is considering moving its business to a different vendor (and a different sales rep). The rep approaches the clients and offers to pick the TPA fees of the plan if the plan continues to purchase the investment products through him.  It is clear that this kind of arrangement can be sound when it is made properly part of a negotiated service agreement with a plan vendor.  But with a sales rep without a service agreement- a problem?

Another example could be "tying" arrangements, where a bank has a client’s 401(k) plan as well as holding a corporate loan with the plan sponsor.  The plan sponsor notifies the bank that it is moving its 401(k) to another institution. The bank responds by threatening to call the loan, or not to extend any future credit if the 401(k) plan is moved- a problem?

This is a criminal statute. Unlike the "civil law" ERISA prohibited transaction rules where "intent" doesn’t matter,  "scienter" (that is, intent) is still a critical element.  But still the word is caution.  Compliant compensation schemes are difficult enough to design, given the prohibited transaction rules and the forthcoming 408(b)(2) regs. But don’t forget about the non-ERISA criminal rules when addressing these issues.

If, by the way, you find yourself in these sorts of circumstances, it would be helpful to go talk to your lawyer.

 

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Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   

 

As 403(b) plan sponsors continue to understand and apply new regulations, meet expectations in their roles as fiduciaries and seek assistance with some very tough decisions, the comparison between 403(b) and 401(k) plans generally takes place.  Spending time pondering this question is not a waste of time.  However, there is NO blanket statement declaring either plan type is better than the other for every plan sponsor.  Facts and circumstances must be identified and considered before starting up a new plan or terminating a plan possibly with the intent to set up a different type of plan.

Expenses related to plan documentation, investment products and administrative services are usually the first items to hit the list for consideration on what plan is best suited for the plan sponsor. Weighing the cost is certainly an appropriate approach.  But don’t end up paying the piper because you failed to consider potential limitations with your new plan design… 

 

Continue Reading WEIGH THE COST WITHOUT PAYING THE 403(B) PIPER!

It had to happen if we kept at this long enough. We have written often over the past few years on the minutiae of 403(b), particularly where they demonstrate the often goofy differences between 401(k) plans and 403(b) plans. We have also written some on the finer technical rules which apply to plan distributed annuities, which tend to apply in some pretty unusual ways.

Now there is the rare opportunity to discuss the "crossing" of these two worlds, hopefully without the cataclysmic effect of the crossing of the "proton ray gun" beams in the original Ghostbusters movie. These two areas find a common theme in the handling of mandatory cash outs to terminated employees, of all things.

I make light of this point, but minutiae like this is not without important effect: the "form and operation" plan document rules require us to get it right, or risk serious tax consequences.

It goes something like this: Code Section 401(a)(31) contains the direct rollover rules and applies to both 401(a) and 403(b) plans. Oddly enough, this section also contains the mandatory cash out rules which applies to account balances of less than $5,000 (I say "oddly" because 411(a)(11) actually has the old rule, which still exists, which permits the distribution without consent of amounts less than $5,000 from a tax qualified plan) for terminated participants.

Now suppose you have a 403(b) plan funded with individual annuity contracts, and you diligently drafted 401(a)(31) language containing a mandatory cash-out clause. This rule, buy the way, requires cash-outs to be  made for all participants, and into an IRA, if the plan chooses to have cash outs..

It appears to me as if you may have a problem on your hands.  If the Plan Administrator cannot access those funds in the individual annuity contract, how is it to "mandatorily" cash out sums less than $5,000 and roll it into an IRA when it has no control over those assets? Sounds like a serious "form and operation" challenge.

The real answer probably lies in the  oft-overlooked section 401(a)(31)(C), which only requires a mandatory rollover if the force-out would otherwise be subject to immediate taxation. Forcing a 403(b) annuity contract out of a plan as an in-kind distribution does not appear to have to comply with 401(a)(31), because that force out would not be a taxable event. This means you can turn to ERISA Section 203(e) (Code Section 411(a)11 does not apply to 403(b) plans) which permits the distribution, without consent, of the vested "present value of the nonforfeitable benefit. " It does not require an IRA, or a rollover, or even a cash distribution. The in-kind annuity account distribution seems to work.

A handy tool, by the way, to help manage the Form 5500 "100 participant" rule for audit purposes.

This is where those "beams cross" into the Plan Distributed Annuity (PDA) world.  A 401(a) plan could, instead of following the 401(a)(31) rules,  merely purchase a PDA in the name of the participant without that being a taxable distribution, either. Code Section 411(a)11 DOES apply here (as well as ERISA Section 203(e), in most cases. It uses the term "nonforfeitable accrued benefit," not cash lump sum).  Perhaps a handy tool  clean out certain kinds of plans.

By the way, this further demonstrates the caution one should use: ERISA 203(e) will not apply to governmental and church 403(b)plans-which raises the possibility of forcing out larger amounts. You do not save on the Form 5500 and audit fees (there are none), but it offers some interesting planning opportunities.

 

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Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.