Pooled Account Immediate Distribution?

[AmyETPA]

all of our plans with pooled trustee directed accounts allow for distribution in the first plan year following termination of employment.  Client has a termed participant they want to get paid out immediately and is considering amending to allow immediate distributions.  How many allow for immediate distribution from a pooled plan?  Are there any drawbacks to be considered?  I know that if they did amend to allow immediate that we couldn't then amend back due to anti-cutback.  This plan is PS only with EOY requirement.

[Bird]

1 hour ago, AmyETPA said:

How many allow for immediate distribution from a pooled plan?

Not many, if any, of ours. 

1 hour ago, AmyETPA said:

Are there any drawbacks to be considered?

I was taught that you make 'em wait because you don't want a participant taking the money out and opening a competing business.  I always thought that was a bit paranoid but we have a few hugely generous plans where that might in fact be a problem, so yeah.  In general, I prefer to "let the dust settle" on that type of plan and would be reluctant to change to immediate distributions.  For one thing, if you are on your game, knowing of a pending distribution after the end of the year lets you advise the trustee to raise cash so you're not chasing your tail when stuff happens like it did this year.  

Is there some other provision you could add, like early retirement with age and service, that might not be quite so loose?

[Larry Starr]

8 hours ago, AmyETPA said:

all of our plans with pooled trustee directed accounts allow for distribution in the first plan year following termination of employment.  Client has a termed participant they want to get paid out immediately and is considering amending to allow immediate distributions.  How many allow for immediate distribution from a pooled plan?  Are there any drawbacks to be considered?  I know that if they did amend to allow immediate that we couldn't then amend back due to anti-cutback.  This plan is PS only with EOY requirement.

Never!  Everyone of our plans (I don't know of any exceptions) has a last day provision so all the necessary allocations can be made before he is paid out.  We have no idea what is going to be allocated to the terminee at year end (say, non-elective safe harbor, for example) so we don't want to have to make two distributions (and the client incur twice as much in fees).  Also, we don't want the client to have to deal with making distributions multiple times during the year.  If someone quits every month of the year (I would stop hiring that guy back... JOKE!), then the client is going to have to deal with making distributions 12 times in that year.  Better that we make the distribution AFTER the year is over in which the person has terminated and the year end work for that year has been completed. Then, it's just one distribution and the distribution forms package goes out to all 12 at the same time and, hopefully, we can get most of the paperwork back and make most of the distributions at the same time.

This also prevents employees from "quitting" to get their retirement money and then get rehired (legitimately, because the employer really did want to keep this guy because he's a great worker).  Having the up to year delay avoids that issue completely.

[Larry Starr]

7 hours ago, Bird said:

Not many, if any, of ours. 

I was taught that you make 'em wait because you don't want a participant taking the money out and opening a competing business.  I always thought that was a bit paranoid but we have a few hugely generous plans where that might in fact be a problem, so yeah.  In general, I prefer to "let the dust settle" on that type of plan and would be reluctant to change to immediate distributions.  For one thing, if you are on your game, knowing of a pending distribution after the end of the year lets you advise the trustee to raise cash so you're not chasing your tail when stuff happens like it did this year.  

Is there some other provision you could add, like early retirement with age and service, that might not be quite so loose?

I've heard that old chestnut from a number of people over the years and it doesn't persuade me.  We did have one client where that was a real issue (a head-hunting firm with high end clients where it takes very little money to open a competing operation).  So, they didn't allow payouts AT ALL until NRA.  That was a tough one, but they also had very little turnover and have now been clients for over 30 years and with a number of changes in the ownership and older "partners" retired and younger ones bought the business from them.  They eliminated the NRA distribution requirement about 15 years ago and it doesn't appear to be a real world problem; the very original owner was the one who was paranoid about the issue.

[ESOP Guy]

19 hours ago, Bird said:

Not many, if any, of ours. 

I was taught that you make 'em wait because you don't want a participant taking the money out and opening a competing business.  I always thought that was a bit paranoid but we have a few hugely generous plans where that might in fact be a problem, so yeah.  In general, I prefer to "let the dust settle" on that type of plan and would be reluctant to change to immediate distributions.  For one thing, if you are on your game, knowing of a pending distribution after the end of the year lets you advise the trustee to raise cash so you're not chasing your tail when stuff happens like it did this year.  

 

Many years ago I had a client that had a landscape company with a rather generous PSP.   Part  of the plan that did landscape architecture had a number of well paid people.  As you can guess the people who did the lawn mowing and tended the plants at the nursery weren't the best paid people.  One day he comes in and asks how many years can he make his people wait before they get paid from the PSP.    When we talked to him about it he said we was tired of some of his lawn mowing crew quitting in the Nov/Dec time frame. Getting a distribution in Feb and by the time spring came around they had used the PSP money to buy and truck, mowers.... and was calling up his clients and pricing those services under his price. 

 

The ESOP world it is full of stories of firms that make people wait because they start of having a problem because they make so many employee/owners in their 50s and early 60's millionaires.  They have a brain drain of their most experienced employees realizing if they can get a lump sum shortly after they leave the company they can afford to retire early.  So they make them wait a few years to start getting paid and make the payments in the form of 5 installments. 

 

So it does happen. 

 

I know not adding much value to this thread but.....

[AmyETPA]

Thanks for your input, I agree with all of your takes.  This is a client with a lot of highly paid employees and this guy has been there a long time and has a significant balance so they are trying to be accommodating but that just doesn't fly in retirement plan world.  

 

[Luke Bailey]

If the plan is daily  valued, valuation is not an issue, but if it is not, e.g. has illiquid assets subject to annual valuations, I would think that is the biggest issue.

[David Schultz]

Another thing to consider:  This would be a provision subject to the anticutback rule.  Once you accelerate the timing of the distribution process, you cannot take that away for accrued benefits.  The business owner's heart might in the right place in this instance, but this is an area in which any change should be made after full consideration of the potential long-term consequences to the plan.

[Larry Starr]

10 minutes ago, David Schultz said:

Another thing to consider:  This would be a provision subject to the anticutback rule.  Once you accelerate the timing of the distribution process, you cannot take that away for accrued benefits.  The business owner's heart might in the right place in this instance, but this is an area in which any change should be made after full consideration of the potential long-term consequences to the plan.

100% agreed.