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Accelerated distributions and BRF considerations?

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An ESOP's normal form of distribution is a 5-year installment; the plan document allows that the remaining payments may be accelerated to a single lump sum distribution at the Plan Administrator's discretion.  The sponsor then adopts by resolution a distribution policy that restricts the acceleration to terminated participants, depending upon available cash flow; retirees will be paid installments.  Their ERISA counsel insists that this class-based distinction is non-discriminatory, and besides, the retirees benefit by continuing to enjoy gains from the future stock value growth.

As of 12/31/21 there are three retirees(2 non-hce & 1 hce) paid by installment; and two terminees they want to accelerate, 1 non-hce of <$5k and 1 HCE(former 5% key) with a $750k account balance. The retirees installments are less than $300k, and their total balances are less than $700k.

1.  Is the determination to accelerate distributions subject to BRF?

2. How would you structure that test, amounts distributed this year vs total balances, ratios of eligible distribution amounts, other?

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  • Nate S changed the title to Accelerated distributions and BRF considerations?

Am I reading this right?   The retirees are being paid slower than regular terminated people? 

If true that is odd if nothing else.

I have seen plenty of plans that pay the retirees faster than normal terms and no one tests them.  

So I am thinking even if it is backwards it might not need testing. 

What makes me uncomfortable ( and maybe you) is the HCE that is getting the fastest payment is a former owner.   The timing of the change looks odd if it was done the exact year that person can get paid.   But if the attorney is signing off on it we would get the attorney's opinion in writing and move on.   You can have class based differences like this.   They just better not change is again in the near future were say everyone has to take installments after a former 5% owner got a lump sum.   That would strike me as very risky.  

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Without remarking on the lawyer’s opinion described.

Nate S, if your firm is a TPA or other service provider regarding the plan, consider getting an indemnity for doing what your service recipient asks.

Not only the plan’s administrator (which one imagines is the ESOP-owned corporation) but also the humans who act for it should defend and indemnify the TPA (and all its further indemnitees) against all losses, liabilities, and expenses that arise out of or relate to following the plan administrator’s instructions. Get your lawyer’s advice on the details of the text.

And if there is any doubt about what BRF, other testing, or other service the plan’s administrator instructs the TPA to perform or omit, get everything in the written instruction that sets up the indemnities.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania



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@Peter Gulia @ESOP Guy Oh, no worries on that front, we've made it very clear that their direction runs counter to any commonly accepted guidance available.  I will be presenting a BRF demonstration of this scenario and was just curious if anyone had any thoughts about how to structure it?  Would you use any equalizing factors such as compensation and/or service to show the comparative value of the payments received vs. withheld?

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Yeah, I have never found good guidance on how to test this if it was decided it had to be tested.  I know way back we basically did a very binary 1/0 test.  If the person was getting the better benefit they got a 1.   If they got the lessor benefit they got a 0.   We averaged the HCEs and the NHCEs and it was within 70%.   I know that is the coverage ratio test but we had something that showed the HCEs were well represented in both groups. 

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