Distributions after death

[Guest Blake]

A widow whose husband was a participant in a profit sharing plan did not request her husband's plan distribution until a year and a half after his death. In the interim the market dropped significantly. The plan states that the amount in a participants plan vests at death and shall be distributed in a reasonable time thereafter. The plan administrator has denied the date of death value. I have been unable to find any guidence in ERISA. I would like to find some statutory law, rather than plan/contract interpretation, but have been unsuccessful. Any thoughts, suggestions?

[Mike Preston]

I'm not sure what you are asking for. Profit sharing plans have individual accounts (whether or not each participant has a physically separate account) and allocation dates. On each plan allocation date, the value of each account in the plan is updated to reflect changes since the last allocation date. In some plans, allocation dates occur every day. In others, once a year. Changes include the allocation of new contributions, the allocation of forfeitures and most importantly to your question, the allocation of gains or losses in the underlying investments of the plan.

You haven't given specific dates or amounts, so I'll just use an example. Assume that the plan has one allocation date a year, on December 31, and that the date of death was 18 months ago, or sometime in August of 2000. At that time, if one were to look at the value of the participant's account, they would find that it would be the 12/31/1999 value. Let's assume that value was $25,000. On 12/31/2000, the next plan allocation date, the participant's account would be credited with contributions, if any, for the 2000 year. For argument's sake, let's say there weren't any contributions (or foefeitures) for that year. Then the account would be increased (or decreased) to reflect the gains (or losses) in the plan's investiments since the last allocation date (in this case, 12/31/1999) By way of example, let's say that the underlying investments went down by 10% in that 12 month period. This participant's account value on 12/31/2000 would then be $22,500.

We follow the same logic through to the end of 2001. Again, let's say that the underlying investments went down by another 10% in the 12 month period ending 12/31/2001. This participant's account value on 12/31/2001 would then be $20,250. If a distribution is made after 12/31/2001 the plan would be required to pay the widow $20,250. No more. No less.

If the allocation dates under the plan are more frequent, the account values change more frequently. But the basic pattern still holds true: if the underlying investments in the plan go down, so does the account value for this participant's widow.

The fact that the monies were not paid out until a significant time after the date of death does not change the requirement that the amount to be paid is based on the account value at date of distribution, not the account value at date of death.

About the only way that the widow could claim that she should receive more money is if she claimed that the people who were responsible for investing the funds (the fiduciaries) violated the rules on investments (breached their fiduciary duties). In the last 24 months, nearly all pension funds have consistently lost money. To claim that the fiduciaries were in violation of the rules solely because the underlying investments went down in the last couple of years will be a mighty tough argument to make.

If you are looking for citations, the "accrued benefit" in a profit sharing plan is defined at Section 3(23) of ERISA and in the Internal Revenue Code under Section 411(a)(7).

Sorry to be so negative, but it looks to me like the plan is doing everything right.

[Kirk Maldonado]

Blake:

If the value of the account had gone up in the interim, would you client insist on taking the date of death value, which would be less?