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In-kind Distribution a Protected Benefit?


Guest TortoraG

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Guest TortoraG

We are planning to merge two 401(k) plan that allow cash and in-kind distributions into a third 401(k) plan. The merging plans are participant-directed in various mutual funds. The in-kind provision would allow, for example, a mutual fund to be retitled into an IRA upon severance. Is this in-kind distribution option a protected benefit under 411(d)(6)? Must we offer in-kind distributions in the new plan? The new plan will offer mutual fund options but not the same ones as the merging plans.

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Guest RARogers

If you look at the accrued benefit regulations, you'll see that an in-kind distribution right is a protected right. (This is a problem.)

But you'll also see that the plan sponsor can change the investment alternatives, and the investment alternatives are not a protected right.

This can be helpful - for example,if you have an employer stock fund with the right to receive shares of stock allocated to the account, you could (at least theoretically) eliminate the in-kind right by eliminating the employer stock fund. Whether this would work might depend on the wording of the plan.

Perhaps there is some way to work with this latter rule that would help you to "eliminate" the in-kind option.

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