Distribution from Defined Benefit Plan
L1: Distribution from Defined Benefit PlanHello,
My DOB is 10-10-60, I am going to start taking an annuity from my Defined Benefit plan (I was separated from service a long time ago) on 11-1-15. I want to make sure that it is a SEPP. The plan offers the standard annuity options, I am thinking of taking the 66 2/3 Joint & Survivor Option. I have been provided with the benefit amounts, but no account balance. What should my next steps be?
Thanks!2015-08-01 13:52, By: ZeeBee, IP: [188.8.131.52]
L2: Distribution from Defined Benefit PlanI’m not sure if this is even a SEPP, nor would you necessarily want it to be one.
As far as the options, in these types of situations, I normally consider taking the 100% option, and buying term life insurance ( 15, 20, 25 yr, whatever makes sense) because it usually is a better approach. Especially when you take into account that the life insurance proceeds will be TAX FREE, while the Pension is Taxable, and the life insurance pays off upon death, while the reduced benefit continues for the survivor’s lifetime.
The Life Insurance approach is also better if there are beneficiaries (children/grandchildren) that you would like to leave money to.2015-08-01 15:36, By: dlzallestaxes, IP: [184.108.40.206]
L3: Distribution from Defined Benefit PlanI agree with the 100% option, but my guess is that it may not be available.
I know that when I retired, my only options were monthly distributions – I chose Joint & 100% because my wife will probably outlive me (her parents and grandparents all made it to their mid 90s) by many years.2015-08-01 15:52, By: Gfw, IP: [220.127.116.11]
L4: Distribution from Defined Benefit PlanI know that Defined Benefit Plans are a dieing breed, so I’m not sure if they still have 100%.
If not, they probably have 75%/25%, which is better than 50%/50%, 66 2/3% or 33 1/3%.
We both agree that you take the life insurance, and the highest available benefit for the worker to start with.2015-08-01 16:12, By: dlzallestaxes, IP: [18.104.22.168]
L3: Distribution from Defined Benefit Plan”I’m not sure if this is even a SEPP, nor would you necessarily want it to be one.”
Well, I don’t want to pay the 10% penalty, but I do want to start the benefits soon. That is my primary concern.2015-08-01 16:46, By: ZeeBee, IP: [22.214.171.124]
L4: Distribution from Defined Benefit PlanFrom what you are describing, it isn’t a SEPP plan and it doesn’t need to be one. It sounds like a pension plan with an early retirement option available at age 55.
Look through your “Summary Plan Description” and it should talk about your options. Then talk to you “Plan Administrator”typically your ex-employer and they should be able to talk about the tax issues that you can expect – probably just ordinary income not subject to either FICA or FUTA.2015-08-01 17:07, By: Gfw, IP: [126.96.36.199]
L5: Distribution from Defined Benefit PlanI am not so sure that this will not be a problem. Most DB plan distributions follow separation at 55 and the 1099R is coded 2 to reflect the penalty exception. Code 2 has also been provided when the employee separates a short time short of 55 but accepts a severance rollout to 55. Without these situations applying in your case, you might end up with a 1099R coded 1.
Ask the plan administrator what distribution code they will assign to the 1099R. The SEPP exception does not apply because the plan is not using one of the methods in RR 2002-62 to calculate your benefit, and the SPIA exception does not apply because this is not a NQ annuity. I don’t know on what basis your 1099R could be coded 2. Of course, you might qualify for other penalty exceptions, but disability is probably the only one that would get you to 59.5 and cover the entire annual distribution.
Note that if you were offered a lump sum option, you could roll it over to an IRA and start a SEPP with the IRA to eliminate a possible penalty for 4.5 years.
If the plan tells you they will provide Code 2, better double verify that with another rep because otherwise the tax Dept could blindside you with a 1099R with the 1 code.2015-08-01 22:09, By: Alan S, IP: [188.8.131.52]
L6: Distribution from Defined Benefit PlanThanks Alan S for your very informative reply. I was afraid of that.2015-08-02 02:09, By: ZeeBee, IP: [184.108.40.206]
L7: Distribution from Defined Benefit PlanAlan- Doesn’t his 11-1-2015 first payment mean he is over 55 when his pension payments start, so the 1099-R will be coded with a “2” until he reaches 59 1/2, then with a “7”? I retired at 55, and started my defined benefit pension the next month, and itwas alwayscoded with a “2” until I reached 59 1/2 and since then, it has been a”7″.
DLZ- I think the 100% phrase you mentionedcan be confusing. It looks to me like you are saying take no spousal option (0r 100% for the employee only), while Gordon says he chose the 100% spousal option, which is theopposite. I am guessing that by that fact that you said that he should take the highest payment. I took the 100% spousal option, and it yielded the lowest of all my options, but meant my wife could get the same pension if she outlived me. You may want to clarify what you mean by 100%, since I don’t think it is what Gordon meant. I could be wrong.
2015-08-02 03:15, By: Ken, IP: [220.127.116.11]
L8: Distribution from Defined Benefit PlanI meant that the employee should take the 100% EMPLOYEE option, with -0- for the spouse to maximize the distributions during his lifetime. Then I recommend buying a term life insurance policy for 15, 20, or 25 years for probably $ 250,000 or $ 500,000 or $ 1 million to replace the income that would be lost by the spouse by the premature death of her husband. Often the difference between the 100% option and a lesser EMPLOYEE option will be enough to fund the life insurance premiums.
It would make no sense for the employee to take -0- during his lifetime after he stopped working. How would he pay his bills without wages or a pension ?
2015-08-02 04:51, By: dlzallestaxes, IP: [18.104.22.168]
L9: Distribution from Defined Benefit PlanThe 100% option that I was referring too was to take the 100% cash option if offered.
Using Dlz’s option, there must be a difference large enough (after taxes) to pay for the life insurance and not a lot of carriers will offer a25 or 30 year level premium term policy to a 55 year old – especially if health is an issue at the time of application for the insurance.
And even with a 30 year term policy, that only lasts to age 85. And, there are a lot of people that will last long after age 85 … as I mentioned before, ,my wife’s family has a habit of lasting into their 90s – her father id about 94.5 and her mother is 92. I personally am not a big believer inbuying term with thedifference – the net difference/advantage between the life only + the insurance premium and the Joint & 100% option just isn’t there. But everyone’s circumstances and health issues are different.2015-08-02 09:12, By: gfw, IP: [22.214.171.124]
L10: Distribution from Defined Benefit PlanWhile the difference may not be enough to fully cover the premiums, I believe that there is a greater chance of the employee dying before age 85, for example, than after 85.
My bigger concern has always been the possibility of the death occurring much earlier than that, even within a few years of retirement, by either medical or accidental circumstances. That loss of future income can be more devastating than the difference of the options.
I just had a call last week from an 85 year old client who had the opportunity to continue paying premiums of I think $ 5,000/year on a $ 50,000 10-year term life insurance policy. We jointly decided that this was a worthwhile “investment” because he did not expect to live long enough that he would pay more in premiums than his wife or son would receive in proceeds. And he felt that if he happened to live longer and they not collect, so be it. He could afford the annual premiums, and believed that it was a worthwhile opportunity.2015-08-02 12:05, By: dlzallestaxes, IP: [126.96.36.199]
L11: Distribution from Defined Benefit PlanGordon and DLZ, Thanks for clarifying. DLZ- When I say 100% spousal (as opposed to 50%, or 66 2/3% spousal option) I meant she would continue getting 100% of the pension I was receiving after I died. Still hope to hear from ALAN on the 1099 issue.2015-08-02 13:57, By: Ken, IP: [188.8.131.52]
L12: Distribution from Defined Benefit PlanKen, in your case the 1099R should be coded 2 because you separated at 55. However, the OP separated “a long time ago” and therefore does not qualify for the age 55 separation exception. It does not matter when the pension payments begin if the employee separates prior to the year they reach 55. That is why I expect that his 1099R would be coded 1 until he reaches 59.5.2015-08-02 17:22, By: Alan S, IP: [184.108.40.206]
L13: Distribution from Defined Benefit PlanPlease consult your Plan Administrator, buta pension payment paid as a series of substantially equal periodic payments over the life expectancy of the beneficiary based on the plan’s early retirement provision should automatically meet the “Substantially Equal Periodic Payment” testand should receive a 1099 code of ‘2’.2015-08-02 17:41, By: Gfw, IP: [220.127.116.11]
L12: Distribution from Defined Benefit PlanI have never heard of any company offering an option like that. If you were my client, I would ask to see the plan and company instructions to read myself. Then I would write the company myself for a confirmation because I would think that it didn’t sound right.
In effect you are saying that they will paying 100% until both of you die. For your sake it is a great deal, and I hope that you are right, but I doubt it.
Could you possibly saying 100% because she will receive the same amount as you would receive, without realizing that you were actually receiving 50% of your full pension, which is why she is receiving 100% of what you were receiving, but this was actually the 50%/50% option.2015-08-02 18:47, By: dlzallestaxes, IP: [18.104.22.168]
L13: Distribution from Defined Benefit PlanJoint and 100% means that the same benefit would be paid as long as either spouselives. When I retired,the difference between a straight life annuity and a joint and 100% annuity was less than 15%of the life annuity amount.
Health is always a consideration… Since I had both high BP and high cholesterol at that point, the policy would not have been issued standard – I know, I worked for an insurance company for 28 years and shopped various options before retirement. 2015-08-02 19:06, By: Gfw, IP: [22.214.171.124]
L14: Distribution from Defined Benefit PlanDLZ- Here were the defined benefit monthly pension choices thatI was given for retiring after 25 years, at age 55 (10 yrs before reaching max pension at 65), and for also starting to collect at age 55. (I had two reductions in my pension calcdue to those two factors.)
Life Annuity $1914
Life with 120 months guaranteed $1878
Joint with 50% survivor $1809 / $905
Joint and 66 2/3% survivor $1777 / $1184
Joint and 100% survivor$1716 / $1716
The $200 per month more for choosing single life (top one) was not worth trying to get insurance with the extra money, especiallysince I am in the 25% bracket because ofmy IRA withdrawals and our social security payments since age 62, so it was only going to be $140 after FED and Mass tax. As Gordon said, there is not a huge difference between the two options.
I have been collecting this pension monthly since 2006, and I have a letter from the corporate benefits office that verifies it continues at this amount for my spouse if she outlives me. It is a $3 billion dollar company, so I have no concerns about them keeping their commitment.
2015-08-04 04:03, By: Ken, IP: [126.96.36.199]