Converting Defined Contribution Plan Benefits To Annuities Through Rollovers To A Defined Benefit Plan: Practical Considerations For Employers

Employers who sponsor both a 401(k) or other defined contribution plan and a defined benefit pension plan may be able to offer participants a lifetime income benefit that is already largely in place. Such employers can permit terminating employees who are covered under both plans to roll all or a portion of their defined contribution benefits over to the pension plan to receive a greater life annuity benefit from the pension plan. This approach may be beneficial for retirees and other terminating employees, while still helping to minimize the employer's administrative burdens.

For retirees, this rollover feature is a convenient (and tax-deferred) means to convert lump-sum defined contribution plan benefits into a guaranteed stream of retirement income. It is an optional feature that would not create any burdens for participants who wish to receive their defined contribution benefits in a lump sum. From the employer's perspective, all defined benefit plans are subject to the qualified joint & survivor annuity (QJSA) requirements under ERISA and the Internal Revenue Code (Code), but defined contribution plans that do not offer annuity forms of benefit are not. This approach allows defined contribution benefits to be annuitized indirectly through the defined benefit plan, without subjecting the defined contribution plan to QJSA complications.

Employers should be aware that this approach has a few complications and limitations of its own. In Revenue Ruling 2012-4, the IRS clarified how certain qualification requirements apply under this scenario, so that employers can be comfortable that it will not trigger compliance problems. In particular:

Underfunded Pension Plans. If the defined benefit plan's funding level is below 60 percent, the plan cannot accept rollover contributions during any year in which this level of underfunding persists. This is because the Code Section 436 funding requirements that apply to single-employer defined benefit plans mandate that benefit accruals cease if the plan has a "severe funding shortfall," and the benefit liabilities attributable to the rollovers would constitute additional accruals.

PBGC Guarantees. In the event the defined benefit plan is terminated while underfunded, all benefits (including those attributable to rollovers) become subject to the guaranteed benefit limitations set by the Pension Benefit Guaranty Corporation (PBGC). The Revenue Ruling indicates that a participant must receive a disclosure...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT