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t.haley

Effect of uncashed distribution check during claim appeal

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Client completed paperwork to received lump sum distribution based on benefit estimate.  Long story short - by the time the paperwork was processed and check was issued, IRS issued new interest rates used to calculate lump sum.  Plan sponsor applied new interest rates, resulting in lower distribution than shown on benefit estimate.  When client received distribution check for lower amount, he began claims process to dispute benefit calculation (the appeal process is currently on-going).  He never cashed the distribution check, which is now stale.  Due to the passage of time, the applicable interest rates have again changed, but now in my client's favor.  If his benefit was calculated today he would receive more than the original estimate.  My question is this - what effect, if any, does the fact that he went through the process to request a distribution and received a check (but did not deposit it) have on his right to start over with the distribution process and request a new distribution based on the new interest rates?  

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Unless it's a required cashout he can start at a later date.

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I agree the participant could have elected to postpone commencement, but if I'm understanding the situation correctly, it sounds like the participant agreed to a certain benefit date, received payment on that date, then changed their mind after the fact. Based on that fact pattern I would say it's too late. The IRS said (last year, I think) that once the plan cuts a check the benefit is considered distributed, regardless of whether the participant cashes it.

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I think some of the "long story short" might be relevant.  Did the PA tell him he needed to respond by a certain date?  Did he submit the paperwork timely?  Did the election package contain information about the impact of delaying the election?  Whose "fault" was it that the distribution wasn't paid the first time?

Once the timing became impossible on the first payment,  I don't think the PA can just issue a check for a lower amount.   They had no participant election to pay the smaller amount and therefore no authority to pay it..  They should have sent a new election package with updated amounts.  Then the participant could have decided if they wanted the lower payment, or continued to defer the election.  You might be able to argue that not cashing the check was the only avenue available to the participant.  Now that rates are lower, he should re-submit his application and request an updated election package. 

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2 hours ago, C. B. Zeller said:

I agree the participant could have elected to postpone commencement, but if I'm understanding the situation correctly, it sounds like the participant agreed to a certain benefit date, received payment on that date, then changed their mind after the fact. Based on that fact pattern I would say it's too late. The IRS said (last year, I think) that once the plan cuts a check the benefit is considered distributed, regardless of whether the participant cashes it.

Ditto.

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18 hours ago, t.haley said:

Long story short - by the time the paperwork was processed and check was issued, IRS issued new interest rates used to calculate lump sum. 

I was reading it differently.  this statement implies he did not receive the payment by the date illustrated on the election form.  Maybe he returned the paperwork late, maybe the PA issued the check late, but either way, it was issued after the date illustrated. 

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4 minutes ago, Effen said:

I was reading it differently.  this statement implies he did not receive the payment by the date illustrated on the election form.  Maybe he returned the paperwork late, maybe the PA issued the check late, but either way, it was issued after the date illustrated. 

Getting a little off topic - I work mainly with CB plans so forgive me if this is a silly question - but if a plan defines the stability period for 417(e) as the calendar month, and you have to give the participant 30 days to consider their distribution options, then how do you ever get a valid election form into the hands of the participant? Won't the lump sum always be different from the amount illustrated due to new segment rates being issued while the participant was reviewing their options?

To bring it back on topic - assuming that the answer to the above question isn't to provide an entirely new set of disclosures every month, doesn't that imply that the plan should have some way of dealing with the fact that lump sum amounts will fluctuate based on timing?

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I assume your question is about a traditional DB and not a cash balance plan?  Assuming so, it would be a very poor/impossible design to use a one month stability period.  I hope this is a hypothetical question and you really don't have such a creature.  

Your election package should state the relative value of the optional forms, and explain how interest rates impact the value of the lump sum.  We always quote a lump sum amount, and a date of payment, with a comment that if the lump sum is paid after that date it is subject to change.  If a participant delays returning the paperwork, or if there is a delay for some other reason beyond that stated date, we ask then to sign a new election form, especially if the lump sum goes down.  Others maybe more lax, but that is our procedure.  If the PA caused the delay and the lump sum declined, I am more sympathetic to the participant and recommend they receive the higher amount.

 

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In addition to Effen's comments, also consider whether there is any ability to "manage" the timing in the future.  Suppose the stability period is the plan year (for example, ending 06/30), and the employee is retiring effective July 1, that means the interest rates should change for any LS paid on or after July 1.  However, if the payment can be made on June 30, then you can use the prior year's rates.  If the EE initiates a retirement application 3-4 months in advance, there should be sufficient time to address this Q;  however, if the EE initiates a retirement application very late ("I'm retiring at the end of next week"), you will (probably) know that all the paperwork cannot be completed prior to June 30.  And be consistent.

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Thank you for all the responses.  Just to clarify a few things - the plan requires the use of the interest rates issued by IRS each November for lump sum distributions made in the following calendar year.  Participant timely completed paperwork for distribution in early November 2018 for a distribution in March 2019.  The estimate given to him (and which he accepted) was based on the November 2017 rates.  When the distribution was made in March 2019, the plan recalculated using the November 2018 rates which had changed from the November 2017 rates used to calculate the benefits, resulting in a lower lump sum distribution.  He immediately contacted the plan administrator to question the lower amount and we are still "discussing" the issue with them.  

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IMHO, it was just sloppy to provide a LS estimate knowing the interest rates are incorrect.

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That's our thought too.  At this point, the interest rates have changed again to the participant's favor and if he were to request a lump sum distribution he would receive more than the original estimate and the check that was ultimately sent.  We are trying to avoid the argument from the plan administrator that the participant has already received his distribution (even though he did not cash the check - and cannot cash the check now because it is stale).

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I think the plan administrator is right - the benefit was paid in 2019. Whether or not the participant cashed the check is irrelevant. Was a 1099-R issued?

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