Attorney Urges IRS to Change Minimum Distribution Requirements for Some Plan Transfers

John J. Joyce Jr. of First Allmerica Financial Life Insurance Co., Worcester, Mass., has urged the Service to consider changing the requirements in reg. section 1.411(d)-4 Q & A 3(b)(iii) to permit the transfer of a separately calculated component of a benefit, rather than the entire benefit. As a result of changes in First Allmerica's defined benefit plan, Joyce says, some plan participants have a benefit that consists of two distinct components -- an integrated unit credit benefit and a cash balance benefit. Recently, he says, several participants have expressed interest in transferring their cash balance benefit to the company's 401(k) plan.

Under reg. section 1.411(d)-4 Q & A-3(b), Joyce asserts, First Allmerica would have to preserve all the section 411(d)(6) benefits under the defined benefit plan in order for the employees to make the transfer. Because the company can't afford to preserve all the benefits, he says, it can't permit its employees to transfer their cash balance benefit to its 401(k) plan.

As the company would like to offer the elective transfer option, Joyce urges the Service to consider changing the reg's requirement. Specifically, he wants the reg to treat the transfer of a benefit's separately calculated component as the transfer of the entire benefit.

====== FULL TEXT ======

August 7, 1998

Internal Revenue Service

RE: Notice 98-29

Dear Sir/Ms:

[1] I serve as in-house counsel for First Allmerica Financial Life Insurance Company ("First Allmerica"), a life insurance company organized under the laws of the Commonwealth of Massachusetts, with its principal place of business located in Worcester, Massachusetts.

[2] For many years First Allmerica has maintained both a non- contributory qualified defined benefit plan and a qualified 401(k) defined contribution plan for eligible employees. Virtually all employees who are participants in the defined benefit plan are eligible to participate in the 401(k) plan.

[3] Until 1995, the defined benefit plan contained an integrated unit credit benefit formula. Effective December 31, 1994, benefit accruals under this formula were frozen for all employees except for certain long-service employees. Effective January 1, 1995, the old formula was replaced by cash balance formula under which eligible employees accrue an annual benefit expressed as a percentage of their compensation.

[4] As a result of the above-described change, plan participants who had accrued a benefit under the old formula who then began to accrue cash balance benefits will have an overall plan benefit that consists of two distinct and separate components -- an integrated unit credit benefit and a cash balance benefit.

[5] Upon retirement or termination of employment, generally participants can elect to receive their vested cash balance account in cash, elect a direct rollover of their vested account or elect to maintain their vested account in the plan until normal retirement (in the case of a termination prior thereto where the present value of the participant's entire vested accrued benefit exceeds $5,000). However, except in situations where the present value of a participant's vested unit credit benefit does not exceed $5,000, cashouts of such benefits are not permitted. Additionally, if the present value of a participant's aggregate vested benefit accrued under both formulas does not exceed $5,000, generally the participant will be involuntarily cashed out in a lump sum. In other words, except in the case of an involuntary cashout, most participants who accrued benefits prior to 1995 will be entitled to elect a lump sum cashout of their vested cash balance account but will not be eligible to receive their vested unit credit benefit in a lump sum; rather such benefit generally must be received in the form of a single life annuity (or qualified joint and survivor annuity, in the case of a married participant).

[6] The defined benefit plan contains a number of annuity options as well as the limited lump sum option described above. The 401(k) plan contains a lump sum option, annuity options and an option that allows participants to defer distribution of their account beyond retirement or other termination of employment. This 401(k) plan option is particularly attractive to retirees, as it allows them to make ad hoc non-periodic withdrawals as financial needs arise. While generally cash balance account distributions can be deferred under the defined benefit pension plan, the pension plan does not offer the advantage of ad hoc withdrawals.

[7] A number of employees who are participants in both the defined benefit plan and the 401(k) plan have inquired as to whether they could transfer their vested cash balance account balance upon retirement or other termination of employment to the 401(k) plan. They recognize that if such a transfer were permitted that they would then have the ability to elect the above-described 401(k) deferral option with respect to both their cash balance and their 401(k) accounts. We would like to be in a position to offer such an elective transfer right to our employees. However, except for elective transfers described in section 1.411(d)-4, Q & A-3(b) of the Regulations, any such transfer would require the preservation of all section 411(d)(6) protected benefits provided under the defined benefit plan. Because of the administrative costs, we have decided that we are not in a position to offer such transfers if section 411(d)(6) benefits need to be protected.

[8] While we are in a position to meet the requirements of section 1.411(d)-(4), Q & A-3(b) with respect to participants who have only a cash balance account (i.e., participants without a grandfathered unit credit benefit) and participants whose vested grandfathered benefit can also be cashed out on an elective basis (i.e., participants whose vested unit credit benefit present value does not exceed $5,000), we are not in a position to comply with such requirements with respect to participants who are able to elect a lump sum payment of their cash balance account balance whose vested grandfathered benefit cannot be cashed out because its present value exceeds $5,000. In the case of such participants, we are not able to comply because of the requirement that the amount transferred must equal the participant's entire nonforfeitable accrued benefit under the transferror plan -- see section 1.411(d)-4, Q & A-3(b)(iii).

[9] In situations like our defined benefit plan, where because of a change in the plan benefit formula participants are entitled to a benefit consisting of two or more distinct and separately calculated components -- in the case of the First Allmerica plan, a separately calculated integrated unit credit benefit and a separately calculated cash balance benefit, there appears to be no reason why the requirement of a cashout of the entire nonforfeitable accrued benefit could not be applied separately to each separately calculated benefit. Such a change would be beneficial to participants in situations such as ours where the transferee plan offers more settlement option choices then [sic] the transferror plan.

[10] In light of the foregoing, I urge you to consider changing the requirement of section 1.411(d)-4, Q & A 3(b)(iii) of the Regulations, such that if a transferror plan has a benefit that consists of two or more distinct and separately calculated components, that the requirement that the entire nonforfeitable benefit be transferred will be satisfied as long as an entire nonforfeitable separately calculated component benefit is transferred.

Very truly yours,

John J. Joyce, Jr.