OK for money purchase plan to begin payments at normal retirement age

[imchipbrown]

Had an audit today of a one-man MP Plan in the SF Bay area. Never had an EZ audited.

Anyway, the auditor (nice lady, like all SF auditors) raised, to me, a really curious issue. My client is 65+ and has begun distributions. She wanted to know where in the plan it said that he could begin to receive distributions, unless he was "retired".

My initial reaction was "What the hell are you talking about?" except, the document really doesn't address (by my cursory reading) the issue flat out. It talks about when terminated people get their benefits, disabled people, dead people, etc., but doesn't specifically say a person, still employed past Normal Retirement Age may elect to begin receiving benefits.

It felt like arguing "Show me the air, and I'll believe it's keeping me alive". I mean, it's a retirement plan, but "retirement" isn't defined, but Normal Retirement Age and Date are (or course).

Anyone else feel that you actually have to quit working and shut down your business to begin receiving benefits?

Can you imagine trying to defend a practice of not paying a rank-and-file guy against the DOL unless he quits?

We never did agree on the subject (closing letter will be some weeks) but, I argued, the whole document is about getting benefits, and only the special cases when they can be delayed are addressed.

BTW, it's a prototype from a big Illinois company with some smart people working for them.

[david rigby]

I'm having trouble being sympathetic here.

A qualified plan should specify this issue. Either way, the plan should state it.

Most of the documents in our office specify that no benefits will be paid until the participant has retired, died, terminated, become disabled, etc. (or some similar language). The purpose of such language is to remove all doubt. If benefits may commence at NRD, you want to spell it out to remove doubt. I'm surprised that the prototype did not include this, or at least an option to spell it out.

IMHO, in the absence of anything, I would assume that payments are supposed to commence after a severance of employment, because that is what a plan is for (speaking in general).

[Kathy]

For what it's worth, my two cents worth:

Pension plans are not supposed to permit in-service distributions. Profit Sharing Plans can for certain specified reasons - hardship, employer money which has been in the plan for a specified period of time, attainment of a certain age, etc... but Pension plans are supposed to be for retirement and not before. Therefore, if the plan document does not specifically allow distribution upon retirement age even though the person is still working, don't do it.

[imchipbrown]

Thanks for the input. After tossing and turning, I came to work and read the "Distributions" section (6 pages, 6927 words of fine print).

The FINAL paragraph (out of 126 paragraphs) does clearly state that a Participant, upon reaching NRD, may receive a distribution of all or any portion of his benefit.

WHEW.

[Dave Baker]

My Corbel-provided defined contribution regional prototype doesn't have that kind of express language, though ... one can wiggle into it, but it's not as black-and-white as the provision yours has. I think this is going to be clarified in the next version.

I think the "no in-service" distribution rule was intended to make people get serious about saving for retirement ... sure seems like there's no good policy reason to prevent working people from obtaining a pension distribution at the plan's normal retirement age. But I guess nailing down this privilege in the plan document is the best course.

[Wessex]

Almost all of the plans with which I am familiar expressly provide that commencement will be after termination of employment or retirement, although a few do give an employee an election whether or not to commence at age 65. As an interesting (???) side note to this discussion, the Department of Labor certainly contemplates payment of pension benefits prior to a termination of employment unless the plan goes through some hoops. Department of Labor Regulation 2530.203-3 deals with "Suspension of pension benefits upon employment." ERISA (and the corresponding Code provision) refer to benefits not being treated as forfeitable if "payment of benefits is suspended for such period as the employee is employed, subsequent to the commencement of payment of such benefits." Section 2530.203-3©(1), however, does away with the commencement requirement and extends the "hoops" to situations where "benefits would have commenced if the employee had not remained in or returned to employment." Section 2530.203-3(a), in contrast, cites the ERISA provision.

[imchipbrown]

Since we're naming names, I'm using the Datair Regional Prototype Defined Contribution Plan.