Distribution restriction pending determination letter

[Guest JM123]

Plan terminated and sponsor no longer exists (and business completely dissolved), so that all employees have terminated employment and would be eligible to receive distribution of entire account balances. Termination amendment limits distributions to a specified percentage of account balances, and the remainder distributable after receipt of favorable determination letter. Would the distribution be an impermissible cutback? Or is there an exception for terminating plans, which have an interest in preventing mass withdrawal before all plan expenses have been identified and allocated to accounts?

[Guest Sieve]

I don't think that would be a problem, but that presuppsoes that an FDL will be applied for and carried through to a positive conclusion. If no FDL applied for & received, then, yes, it would be a cutback or a vesting violation, and would disqualify the plan.

[Mike Preston]

I don't think it would be a problem whether or not there is a DL in the works. You can look at it a different way. Distributions from accounts are allowed at any time. The accounts will be charged a pro-rata share of expenses (including accruals) immediately. You accrue whatever you want to "hold back" and allow distribution of the balance. Once the accrual is reconciled, you again have account balances that can be distributed. I just don't see the issue.

[Guest JM123]

Thanks for the responses.

MP - the concern is whether imposing a 50% limitation on benefits that would otherwise be payable on application constitutes a prohibited cutback, because each of the employees was considered to have terminated service. Does this affect your answer?

[Guest Sieve]

Mike is saying, I think, that as long as you reconcile adminstrative expenses and other charges to accounts, and then make a second & final distribution of the remaining account balances, then there's not a problem and there is no cutback. I certainly would agree with that analysis--it's not unusual for the administrator to withhold all distributions temporarily while an FDL is in process. However, I viewed your inquiry a bit more narrowly (maybe too narrowly): since the amendment apparently specifically permitted a subsequent distribution only upon reciept of an FDL, there might never be a second distribution (if an FDL is not applied for or received) and, therefore, there is the potential (however unlikely) that a cutback could occur.

[KJohnson]

I asked that specific question at the IRS Q&A session at the Mid-Atlantic meeting this past spring. I was told that they recognized that there might be a technical problem in eliminating an optional form (plan previously said you can get a 100% distribution as soon as you terminate employment and you are now saying they can't--they have to wait for a DL for a distribution).

They indicated, however, that they would never raise this in practice as long as you had applied for the DL. Whether a participant could raise this is another question. Whether you can do it in practice without an amendment is another question.

Here is a real old Q&A (has some pre EGTRRA references to separation from service ) but I think the "technical" problem might still be there.

http://benefitslink.com/modperl/qa.cgi?db=...ions&id=202

[Mike Preston]

I think this is a matter of reasonability. If you accrue expenses and appropriately charge them to participant accounts (even if you have to have a special valuation to do so), you should be fine. If the expenses turn out to be less than originally accrued, folks are entitled to an additional distribution. If your accrual is unreasonable, it could very well be viewed as subterfuge for an impermissible 411(d)(6) cutback. Otherwise, it just has to be allowable. With that said, if there are any questions as to the validity of the approach, ERISA counsel should be engaged.

[KJohnson]

I agree it is not a cut-back in any accrued benefit based on the posts above. I am just not aware of any easy answer to the question on whether it impermissibly eliminates an optional form. The regs state that optional forms of benefit may result from differences in terms relating to the payment schedule, timing, commencement, medium of distribution (e.g., in cash or in kind), .... Thus it seems like getting a distribution upon termination of employment is an optional form and now you are eliminating it. There is an exception for deminimis changes in timing but that has to be within two months of the original time for distribution (at least for a distribution upon termination of employment). I just didn't see any other exception.

That said, it is a common practice and at least the IRS has said informally that it won't challenge it. If DL's start taking longer than a year, I do wonder if a participant will ever raise a question. My practical response has always been wait to distribute until you get the DL. If you get lots of participant push back or threats before then you can revisit. Other issues can also come up in the interim.. RMD's QDRO's etc.

[david rigby]

Is there is a potential problem in how those expenses are allocated? For example, suppose some participants receive a 75% distribution and others receive zero (due to a variety of administrative reasons), then the "final" expenses are determined.

- What is the base for allocating those expenses?

- Does the length of the intervening time period matter?

- Does the type of expense matter?

Anyone have experience with that?