ESOP Distributions and 401(a)(14) Election

[piquantbaron]

I have an ESOP client that has adopted a distribution policy whereby distributions for a particular year will be made in Q4 after the latest annual valuation has been completed and the company has a good idea of what its cash flow for the year looks like. The company then uses this information to determine its capacity for making distributions (e.g. if the company is short on cash it will use the stretch provisions to make installment payments for all participants who have elected a distribution, otherwise it will have a mix of lump sum distributions (for lower account balances) and installments  in a nondiscriminatory manner).

 

Is this distribution policy in violation of the distribution commencement rules of IRC 401(a)(14) when 65+ (Normal retirement age under the plan) former participants make distribution requests because it is making distributions in December instead of late February/early March?

 

I believe the requirement under 1.401(a)-14(a), which permits a plan to require a participant to file a claim for benefits before payment commences, and the retroactive payment rule in 1.401(a)-14(d), which allow distributions to be delayed until 60 days after the payment is able to be determined, can be used in conjunction to delay most distributions under the proposed timeline above, but I'm curious to hear what others think as I understand some plan sponsors seem to ignore this rule.

[ESOP Guy]

There are a lot of facts that could change my answer in my opinion.

Are you saying for example they have the stock price early in the year (say April or May- pretty common for ESOPs) but they still want to not make the payments for people this law requires until Q4?   That strikes me as aggressive to say the least.  The amount of the payment is known.  You know the account balance is that the payment will be based off by that early time.  What exactly allows them to not pay at that point in 60 days?  The fact they haven't decided if it is going to be an installment or lump sum because of the business' conditions?   I am not sure I would allow what is happening at the company level delay what happens at the plan level.   I am not sure that makes the amount something that can't be ascertained before December. 

Part of it is I haven't seen a distribution policy that allows them to bounce back and forth like you describe from lump sums in 2018, installments in 2019 to go back to installments in 2020 all because of the business' cash flow position in those years.   ESOP distribution polices are way more flexible than other plans but that sounds like they are pushing it.  

For what it is worth I see two very aggressive positions what you describe.  I can't cite anything that says it can't be done but I would be careful saying you don't have to pay until December if the stock price is known in Q1,2, or 3 just because the business hasn't decided if it has the cash flow to offer lump sums vs installments. 

[Cardscrazy]

I'll just pipe in here, better late than never.  First of all I believe there is some leeway to wait on distributions depending on business circumstances; however, I agree with @ESOP Guy that you can't go back and forth between lump sum and installments.  Our outside ERISA counsel said the same thing and made us adopt a firm lump sum distribution policy in the year following termination when we asked about having a optional lump sum/installment distribution policy.  We were told that we can amend the plan (but NOT every year) to go from lump sum to installments and back to lump sum if we choose.  We're okay being lump sum right now.  But here's how we wrote it for the ESOP SPD with a shorter disclaimer in the ESOP statement's disclaimer, for the purpose of putting everyone on notice that we can amend the ESOP pretty much at any time to allow for installments:

We also did this on the ESOP Statements themselves.