I have just received a note from a client who is terminating a Defined Benefit Plan and rolling the assets to an IRA. All employees have been paid out, etc. The only assets remaining are the owner’s. One of the assets is an annuity contract titled in the name of the DB plan fbo the owner. The insurance company is requesting a release from the owner as plan administrator of the DB plan that he will take full responsibility for any adverse tax consequences from IRS and for any tax reporting requirements.

The insurance company states that it “is not able to guarantee an owner change and annuity type change of the contract would completely satisfy IRS regulations regarding a distribution of the funds to the participant.” They go on to say, “A way to track the distribution for IRS purposes would be to surrender the contract and establish a new IRA contract in the name of the participant, or distribute the funds from the plan to the participant.”

Are there special rules for annuities being rolled from qualified plans to IRA’s? Is re-titling the annuity insufficient or not permitted? I haven’t run into this before and what seems simple is made to seem complex. Is the insurance company merely trying to frighten the customer into cashing in the annuity and buying another one?

Advice would be most appreciated.