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.
