Protected benefit for timing of distribution?

[Richard Anderson]

An employer wants to eliminate participant direction of investments, which is not a protected benefit. But, currently participants may take a distribution immediately upon termination. Can the plan be amended to change the distribution date to after the end of the plan year in which termination occurs, or is that going to violate 411(d)?

[AndyH]

The timing of a payment is an optional form of benefit under 1.401(a)(4)-4(e)(1) and therefore I think it is a prohibited cutback under 411(d)(6) with respect to benefits accrued to increase the waiting period.

[david rigby]

This would appear to violate the regs under IRC 411(d)6). See IRS Reg. 1.411(d)-4, Q&A-1 (B)(1).

http://www.access.gpo.gov/nara/cfr/cfrhtml...26cfrv5_00.html

[QDROphile]

We have been able to get the IRS to issue determination letters on amendments that restricted the distributions to facilitate proper plan administration. The restrictions were reasonable and had good reasons behind then (valuation of assets, usually). "Immediately upon termination" is subject to interpretation in light of reasonable administrative practices anyway. If the plan is changed to be more precise about those reasonable practices, you may be able to get a letter. Don't do it without one. But if you are considering a fundamental change and substantial delay, you are running afoul of the rule. For example, you couldn't change to distibution after a one-year break in service.

[Richard Anderson]

Employer wants to eliminate participant direction and pool assets, with annual balance forward valuations, with distributions occurring after the next annual valuation after termination.

I came across another potential problem with this. The plan allows in-kind distributions. Currently, with participant direction, a few (very few) terminated participants will have their account balance transferred to an IRA with the same custodian, rather than liquidating their account and transferring cash.

Can this in-kind distribution option be eliminated at the same time as the elimination of investment direction?

[Guest Harry O]

QDROphile -

How much comfort is a determination letter on this issue given that the regulations provide that the IRS may only bless the elimination of a section 411(d)(6) protected benefit through "publication of revenue rulings, notices, and other documents of general applicability." Reg. 1.411(d)-4, Q&A 2(B)(1). Seems like the IRS was concerned that its determination letter process might be a bit leaky!

[QDROphile]

Harry O:

I know there are other explanations, but I am comfortable arguing that the Form 5300 specifically asks the question and the answer, fully explained and highlighted in the application, should get appropriate attention and response from the IRS. I may have to make that argument to the mercy of the judge.

If they don't want to deal with the response, they shouldn't ask the question.