401K Plan Termination freeze

[Snicky]

A 401k plan has decided to terminate on 1/1/2020, the company is closing.  There are only 3 participants, one is terminated.  The terminated participant submitted distribution paperwork on 10/31/2019 to move his account to an IRA, but the 401k provider froze the plan as soon as they were notified of a plan termination.  The other two participants are also submitting paper work to roll their money out (one is a part owner).  Does the 401k provider have the right to freeze the plan ?  When can the participants expect to roll their money over, after 1/1/2020.

[CuseFan]

No, the terminated participant cannot be prevented from getting a permitted distribution. The other two cannot get distributions until after they terminate employment or the plan terminates.

[david rigby]

I wonder if "401k provider" refers to the entity holding the money (whether trustee or custodian).   It seems very likely that the "provider" knows exactly what "CuseFan" stated.  Maybe there is something else going on?  Maybe there is concern over payment of fees? or some other outstanding issue.  Just a hunch.

[Larry Starr]

22 hours ago, Snicky said:

A 401k plan has decided to terminate on 1/1/2020, the company is closing.  There are only 3 participants, one is terminated.  The terminated participant submitted distribution paperwork on 10/31/2019 to move his account to an IRA, but the 401k provider froze the plan as soon as they were notified of a plan termination.  The other two participants are also submitting paper work to roll their money out (one is a part owner).  Does the 401k provider have the right to freeze the plan ?  When can the participants expect to roll their money over, after 1/1/2020.

You haven't provided the details necessary to give you an answer.  Who is the 401(k) "provider" and what is the reason they say they "froze" the plan.  Barring something very odd, the plan administrator has the absolute right to approve distributions; has the provider been appointed as plan administrator?  Give us the details and we can better advise.

[hr for me]

years ago, there were certain employees in our 401k plan (the trustees on the plan) that could not take their $s until all other employees took their money out.  So was the person who left once of the trustees? I'd be curious what "froze the plan" means vs "froze distributions". We were with American Funds small plans.... it's been 10 years and a different employer, so I do forget the timing of all the distributions once the termination of the plan was announced though.  It was within a few months....

So I am sitting with Larry  that we need more details.

[Luke Bailey]

Snicky, I am not sure, but my guess is that we have enough info. During a termination, employees who have experienced a termination of employment and are entitled to distribution should still have their distributions processed in the normal course, as if there were no plan termination. Assuming that each plan account is invested in publicly traded, liquid, daily valued assets, and there are no jointly held assets, it should not be a problem to make the distribution here. My guess is that the "provider" you are referring to is the TPA and they are either unaware of the rule here, or find it troublesome for some reason. Certainly, back in the day of pooled accounts and quarterly valuations, there was a concern about letting some participants in a terminating plan out earlier than the others, because of the valuation and liquidation of asset issues. There might also be issues with unallocated forfeitures or similar accounting issues, even in this plan, and the TPA may have a good faith desire to clean those up before distributing. Also, if the costs of the administrative costs of termination (e.g., TPA fees) are going to come out of the trust, there may be a desire to make the separated participant wait so that his/her share of the costs is properly allocated before distribution. But there is no real that freezes distributions to terminating participants during a termination.

[Larry Starr]

3 minutes ago, Luke Bailey said:

Snicky, I am not sure, but my guess is that we have enough info. During a termination, employees who have experienced a termination of employment and are entitled to distribution should still have their distributions processed in the normal course, as if there were no termination. Assuming that each plan account is invested in publicly traded, liquid, daily valued assets, and there are no jointly held assets, it should not be a problem to make the distribution here. My guess is that the "provider" you are referring to is the TPA and they are either unaware of the rule here, or find it troublesome for some reason. Certainly, back in the day of pooled accounts and quarterly valuations, there was a concern about letting some participants in a terminating plan out earlier than the others, because of the valuation and liquidation of asset issues. There might also be issues with unallocated forfeitures or similar accounting issues, even in this plan, and the TPA may have a good faith desire to clean those up before distributing. Also, if the costs of the administrative costs of termination (e.g., TPA fees) are going to come out of the trust, there may be a desire to make the separated participant wait so that his/her share of the costs is properly allocated before distribution. But there is no real that freezes distributions to terminating participants during a termination.

Luke, I don't think you can "guess" that we have enough info to answer the question. By that very admission, you are saying that we DON'T have enough information to definitively answer his questions, which were (as a reminder): Does the 401k provider have the right to freeze the plan ?  When can the participants expect to roll their money over, after 1/1/2020.

Of course, you can post various possibilities given various assumptions, but until we KNOW the situation and what is actually happening here, we just can't answer the question with any degree of certainty. We don't even know if it is a pooled account or a participant directed account.

Just, FWIW.

[Luke Bailey]

Agree pretty much, Larry. My answer is good assuming that the "provider" Snicky is referring to is the TPA or trustee, and that the "freeze" is a blanket rule imposed on plan that all further distributions will be made at same time, based on termination. That rule may be just an edict of TPA, or may have been inserted into resolutions prepared for plan sponsor. Will be interesting if Snicky has any further facts to add.

[Larry Starr]

On 11/26/2019 at 4:44 PM, Luke Bailey said:

Agree pretty much, Larry. My answer is good assuming that the "provider" Snicky is referring to is the TPA or trustee, and that the "freeze" is a blanket rule imposed on plan that all further distributions will be made at same time, based on termination. That rule may be just an edict of TPA, or may have been inserted into resolutions prepared for plan sponsor. Will be interesting if Snicky has any further facts to add.

Yes, I hope he does come back with more info.  Have a great T-day EVERYONE!

[Lou S.]

I'm guessing there is some contractual language where the custodian of plan assets puts a hold on distributions for "x number of days" when they are notified of transfer to new vendor or complete Plan Termination. I'm guessing this is a large vendor daily valuation platform the OP is referencing as we are running into a similar situation with one of our vendors.

I'm wondering what if any leverage the client has with respect to getting distributions processed more timely.