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What happens if a plan’s administrator does not wait 30 days before paying a distribution?


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The Treasury department’s rule under Internal Revenue Code § 402(f) calls for an administrator to deliver a § 402(f) written explanation “no less than 30 days . . . before the date of [the] distribution.”

 

Internal Revenue Code § 6652(i) imposes a penalty of $100 on each failure to deliver a § 402(f) written explanation.

 

To speed up a plan termination’s final distribution, an administrator is considering deliberately incurring that penalty.  In the circumstances, that amount is much less than the business harm that would result from not completing the plan’s termination by December 30.

 

I’ve already analyzed ERISA title I consequences, including about the fiduciary’s potential obedience and prudence breaches.

 

Is it so that an administrator’s compliance with § 402(f) is not a § 401(a) condition for a plan’s tax-qualified treatment?

 

(The plan’s governing document does not state any provision or command based on § 402(f).) 

 

Am I missing something?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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How many participants would be affected? Is it practical to get everyone to complete a distribution election in time?

Is the concern that the notice isn't being provided at least 30 days in advance? Or will the notice not be provided at all?

If the participants elect a distribution ( as opposed to being forced out) then usually the distribution forms have language in them that the participant acknowledged receipt of the notice, and any 30 day requirement is waived. 

If the participants are affirmatively electing some sort of distribution with their waiver, i don't see an issue with the Notice date and the Distribution process date being less than 30 days apart.

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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Thank you, justanotheradmin, for helping me think this through.

 

The § 402(f) notice was delivered, but not 30 days before the anticipated involuntary distribution.

 

Some participants, perhaps many of those still employed, will waive the 30 days.  But the administrator anticipates some others, especially retirees, won’t respond in any way.

 

After estimating this (and not counting those with a balance under $200), the number of § 402(f) failures would be few enough that the administrator easily can pay the penalty.

 

But the administrator prefers not to risk tax-disqualifying the plan.

 

Is it so that an administrator’s compliance with § 402(f) is not a § 401(a) condition for a plan’s tax-qualified treatment?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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401(a)(31) is a qualification requirement. While not exactly on point, 1.401(a)(31)-1 A-6(b) notes that "A plan will fail to satisfy section 401(a)(31) if the plan administrator prescribes any unreasonable procedure" for electing a direct rollover. Requiring participants to return their forms in less than 30 days could be considered an unreasonable procedure.

What does the plan administrator intend to do with the benefits of participants who do not return a distribution form? Roll them over to an IRA provider (e.g. Penchecks)?

Consider this scenario: the employer sends out the 402(f) notice on December 16. No response is received and the account is rolled over to Penchecks on December 30. On January 3 the participant returns a completed distribution form electing a direct rollover to another qualified plan. The plan will have failed to failed to comply with 401(a)(31) by not providing a direct rollover to the plan specified by the participant.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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C.B. Zeller, thank you!!!!!  You uncovered a lurking issue I didn’t have time to find.  And you explain it so neatly.

 

I’ll advise the administrator about how impairing a distributee’s direct-rollover opportunity tax-disqualifies the plan.  And this will intensify my advice about a fiduciary’s obedience and prudence breaches.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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No.  But a professionally behaving lawyer must not fail to render advice a client asked for.

 

Further, 10 C.F.R. § 10.21 sometimes arguably requires a practitioner to render advice a client has not asked for, might not need, and might not want.

 

In this situation (and for reasons beyond the current issue), the bigger risk is an EBSA investigation about ERISA fiduciary breaches.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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In my experience, the IRS is reluctant to pursue tax-disqualifying a plan that paid its final distributions.  That’s so if the business organization that sponsored and administered the plan has been dissolved and the legal procedures that would raise money from that organization or its former owners or executives would take more time than the IRS wants to use.

 

Also, the § 6652(i) penalty becomes payable only “on notice and demand by the Secretary[.]”

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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