A Surprise Obstacle to Lump-Sum Windows or Plan Termination

May 7, 2014 (PLANSPONSOR.com) - It’s easy these days to find articles about defined benefit (DB) plan lump-sum windows and plan termination.

But surprisingly little has been written about a serious problem that often interferes with these pursuits—participant benefits that have yet to be precisely and finally calculated (aka “certified”).  The considerable time required to correct this deficiency can be an unexpected and burdensome obstacle to lump-sum windows or plan termination, as these activities require certified benefits for all affected participants.

  • When employees terminate, the law requires that their benefits be certified and communicated to them, and reported on IRS Form 8955-SSA.  But many plan sponsors are unaware of this requirement, or are unaware that the amounts being reported on their Forms 8955-SSA are estimates – i.e., not certified.
  • In the event of a plan freeze, there is no similar legal requirement to certify benefits and inform participants.  Consequently, plan-freeze-related communications often include only benefit estimates.


Best practice is to calculate final benefits as soon as possible.  The main reason for this is practical: Benefit certifications only get more difficult as time passes—as plan actuaries or administrative personnel change and data access avenues deteriorate.  Once benefits are certified, this fact should be well documented and participants should be notified, so that the finality of the amounts will never be called into question.

If you sponsor a DB plan, are you certain you have certified benefit amounts for all participants who are no longer accruing benefits?  Is this well documented?  If you’re not absolutely certain of these answers, you might want to investigate, document your findings, and consider taking action.

And don’t forget we’re talking about real dollars for real people so while this is important for plan sponsor administration purposes, it’s also key to participant livelihoods! Which leads to another pertinent question:  When it comes time to pay benefits, will you have on hand sufficient benefit-calculation documentation to satisfy inquiring/doubting participants?  With the passage of time, some may question the veracity of the benefit amounts you provide and ask to see the calculation detail.  Poor records/documentation can make such inquiries difficult and time consuming.

A word of caution:  Some plan advisers use the word “estimate” in virtually all benefit communications other than for retirees commencing payments.  Use of the term “estimate” is intentional, and often serves to limit consultant liability. If you find your consultants are doing this, you may want the practice reconsidered.  Suppose you change consultants at some point in the future.  Sometime later, your now former consultant may not recall whether those old “estimates” may be relied upon as final, and will certainly have little incentive to certify that they may.

Finally, Notices of Plan Benefits (NOPB) required at plan termination are supposed to include all of the data used in the calculation of the certified benefit for each individual—yet another reason to have this information compiled and ready for use.  [Related useful observations: a) It is good practice to include this detailed participant data in all pre-plan-termination communications of certified benefits, so that copies are later available to satisfy the NOPB requirements (and also to minimize benefit-related questions arising at plan termination); b) For plans lacking data detail for some historical benefits, a lump-sum window executed well before plan termination can alleviate some of the headaches otherwise caused by the onerous NOPB requirements.]

IN CONCLUSION:  If you ultimately find a project is necessary to improve your preparedness (and/or legal compliance) with respect to benefit certifications and documentation, such efforts are certain to be rewarded—sooner or later.  On the other hand, if a problem exists and you fail to address it, it will only get worse with time.  And because certifying missing historical benefits can be labor intensive and time consuming, this deficiency can also hinder your ability to open a lump sum window or terminate the plan at the optimal time.

Joseph L. Penick is a principal of Curcio Webb LLC and a consulting actuary. He can be reached at jpenick@curciowebb.com. 


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.     

Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.