Benefits held 10 months w/no interest?

[Guest Bob Mohar]

I terminated employment 12/31/97 after 15 years of service. Employer says I will receive profit sharing plan lump-sum distribution 10/99 with interest for 1998, but nothing for 1999. I thought benefits had to be paid in less than 60 days. What to do??

[This message has been edited by Bob Mohar (edited 02-27-99).]

[david rigby]

what is the plan year? How often does the plan specify that benefits will be revalued? Your 60-day comment is not correct. For example, if your account balance is over $5000, then the plan cannot pay it out to you without your permission (that is, the plan probably has some procedure for you to "apply" for benefits).

Try reading your Summary Plan Description (SPD) for help on when benefits are paid.

[Guest Bob Mohar]

Plan year is calender year. Benefits revalued annually with plan year, i.e. 12/31/xx.

Balance well over $5000.

[imchipbrown]

Bob,

Only thing I can think of is that the return will not be completed until 10/99, and likely that the contribution (if any) has yet to be decided. I would also imaging you'll be entitled to a portion of the year's contribution if you worked 1000+ hours and employed on the last day of the year.

[Dave Baker]

One way to get '99 earnings: don't consent to a distribution. Keep your money in the plan until after 12/31/99, then you'll be entitled (almost certainly) to a share of the net earnings (or loss -- eek) for '99.

But they might make you wait until 10/2000 to get your money after 12/31/99 ... although you could argue, "hey, fellas, all you gotta do for me is spread the '99 earnings or losses, which you'll be able to determine with certainty a few days after 12/31/99 ... I'm not asking for a piece of the contribution or forfeitures for '99."

That argument could be used for '98, come to think of it ... if your plan's "plan year" ends on 12/31 of each year, then I can't imagine that you're entitled to any share of the '98 contribution or forfeitures from other participants' accounts.

[Guest Bob Mohar]

Expect I will get earnings for 1998, but

nothing (no earnings, contributions, or

forfitures) for 1999. If I were 65, company

would pay out within 60 days, but I'm not

so company is keeping the money and getting

earnings from my money. This does not seems

legal?

[Guest AL Minton]

I do third party admin. for many small plans. Waiting until 10/99 for distribution on 12/31/98 is not all that rare, nor is it usually due to the emloyer trying to make interest on a participant's money. To me, it seems like it has to do with employers who can't afford "daily valuation" for participants in an age where all employees view their Plan benefit as his/her money immediately after termination. I get many angry calls from former employees & their brokers about this. Basically, you have a traditional retirement plan in a world of pension protibility. October 15th is the deadline (after extensions) for filing the Plan's annual tax filing. Employers have until the due date (including extension) of the corporate (or sole prop) tax filing to decide & deposit the contribution. Even if a terminated participant weren't entitled to a contribution, the third party administrator usually doesn't complete the trust accounting & annual participants statement of benefits until the contribution has been decided. This is simply due to work flow on the TPA. Also, most of your "older" traditional plan documents specified payouts could not occur until the Plan year following the Plan Year in which the participant incurred a break in service (ie worked 500 hours or less). As a TPA, I think this document language & practice are archaic & would love to see plans amended for quicker payouts & valuations more often than annually -- unfortunately, my clients believe that I just want to complete a valuation more often so I can charge more. My advice to anyone reading this, tell the Dept of Labor your opinion! They (DoL) listened to 401(k) participants & stepped up deposits for that; someday I hope we'll get concrete timing standards for distirbution payouts. P.S. I'm a terrible typist & speller, so I hope you understood all that.

[richard]

The delayed payout might seem unfair and archaic (and perhaps for the administrative convenience of the TPA or the employer).

And, yes it seems somewhat silly(?) in our perfect(?) world of electronics and computers.

And, I'm not in favor of "forcing" terminated particants to wait ten months. (By the way, I suggest to my clients in these circumstances that they make a payout early in the year, even before the contribution is made or the 5500 is filed.)

And, daily valuations can solve this problem, albeit with a cost to the employer that (guess what) will be borne by the employees (either in plan expenses or reduced company contributions). A small per capita cost for a large company, but a large per capita cost for a small company.

However, lest you think you are getting the shaft, consider the following. All of the employees who terminated in the past 15 years had to wait some period of time (up to ten months) to get their account balances. And they didn't get credit for investment earnings. Who got it? Continuing participants such as yourself. So, to the extend you have been "hurt" for investment earnigs over the last ten months, you have probably been helped for similar practices over the past 15 years.

It's not to say the two wrongs make a right. However, this approach has been a practical one for many years, and terminating employees are not getting the shaft as much as they think.

[Dave Baker]

But I've often wondered why a plan can't split participants into two categories: those who have a chance at getting a piece of the contribution or forfeitures pie for their last year of employment, and those who don't (due to a last-day service requirement or minimum hours during the last year of employment). Then it would seem that the plan could do fairly easily and quickly perofrm an allocation of net earnings or losses for the plan year in which employment ended ... meaning the people who aren't in line for a calculation of contributions or forfeitures could get distributions within a couple of weeks after the end of the year in which employment terminated (assuming the year-end asset valuation statements come in within a few weeks after year-end). Why should those people have to wait until all the ribbons are tied on the allocation work for the other participants and the Form 5500 is ready to file?

Caution: I am only a lawyer, not an administrator. The view is great from the ivory tower

[Guest AL Minton]

I'm glad you identified your "ivory tower" status (ie lawyer, not admin) because that is where the problem lies. With daily val & mutual fund advertising, etc. many people think it's cut & dry to I.D. who gets a contribution & to do the trust accounting to allocate earnings.

There is so much more involved in calculating the contribution then determining who is employed on the last day. Many tests have to be calculated with a "passing" grade (as required by ERISA and the IRC) for coverage & for the limit of deductability for both the employer & for all individual participants.

Trust Accounting would be easy if the Plan used one of those big brokerage houses who combine everything on one account statement per month or per year. But many plans have several different accounts. Within each account are a multitude of funds & trades. You get the picture.

In a small company Plan, everything is interwoven. If you care for an example, read on, but I must warn you, I'm under severe stress due to tax deadline (March 15th is a scary day in 401k world) & as a result I'm in a whiny banter:

EXAMPLE: Employer/Plan Sponsor is a sole proprietor doctor. He employs several part time employees. 1,000 hours= 1 year of service. Part time employees work just over or just under 1,000 hrs/year .

Before I can pay out a terminated participant I need the following: complete census (listing compensation, any pre-tax deferrals, new employees, termination dates, hours worked for the year) and asset statements to know the value of the account.

Ideally, the census should be completed at the same time as the W-2 forms since most of the information overlaps. Ideally, January 31st I should have census.

By then all asset statements should also be received by the trustee & forwarded to me. Ultra ideal world, the trustee would remember to add the TPA to receive duplicate statements & avoid the forwarding of 12 months worth at once.

Then, I'd detemine from census who is eligible for the contribution. The simple check is 2 part : 1. who has completed the eligiblity requirements for the Plan (21 years old/1 year of service) 2. of those eligible, who has completed the contribution eligility of 1,000 hours/employed on last day. Then I do a coverage test. I fail the coverage test. I must add in more employees, perhaps a terminated employee, in order to pass the testing. Now that terminated employee (whose calling daily & threatening me for holding his money)gets a contribution. But what, I don't know what amount the contribution will be. I need to do some more testing to figure out the max allowed by law.

I can't do that until I get the Doctor's compensation. But, the doctor doesn't get a W-2 because he's a sole proprietor. So I wait for his accountant to calculate his Form 1040 Sch C comp (before pension deductions). The accountant waits for the doctor to send all his personal info to do the Sch. C.

I get the Sch C comp, now I can determine the contribution. But, because each contribution affects the Sch C comp, I keep changing the compensation & going in a big circle & changing tax brackets on the doctor & bantering with the account until we finally decide the contribution amount.

In an ideal world, the doctor has a super organized office manager who gets all the info to me & the account by Jan 31st. The accountant would be able to work 24 hrs/day Feb 1-Apr 15 & hibernate all summer. So the accountant would get me the Sch C estimate by Feb 3. Circular calculations & bantering would take us 2 days -- because ideally I have no 401(k)plans which have pressing 3/15 ADP test deadlines-- So, on Feb 6th I can complete the trust accounting,allocate earnings & draft the distribution paperwork -- because the doctor has only one account with a mutual fund company whose super expensive computer generated 1 statement & calculated realized gains, etc. After internal review, I send out the distribution letter to the terminated participant on Feb 8th. The terminated participant completes it, gets it notarized & returns it ASAP. By the time he gets his check, the terminated participant has only been out of the market for 6 weeks.

REALITY CHECK -- The super organized bookeeper is the terminated employee, the wife, who is on materinty leave from her job, is filling in as the office manager, the accountant has other clients like a college dropout turned successful computer wiz that require more immediate attention & the doctor, under the influence of radio commercial brainwashing is now doing his own investing & opened some new funds in the name of the Plan & forgot to tell me so it appears he embelezed enough to send that new baby to Harvard. By the time all the information is received & organized it's sometime between April and Septmeber.

[Larry M]

Hold on a minute there.

Are of you you telling me you wait until you know whether a person is entitled to a benefit and then you determine the proper amount to pay him or her BEFORE you tell the plan sponsor the amount ot be paid - and then you have the sponsor wait until any forms required by law or regulations (those which explain, in simple language, all the complex aspects of the tax laws concerning distributions and the rights of any married participant's spouse) are given to the participant and returned with appropriate signatures before any money is distributed?

I suppose you abide by the plan document's provisions as well.

Personally, I preferred the good ole days when you gave a benefit only to those employees you liked.....and only when you felt like it...

[Ervin Barham]

Al:

Time to take a measure of the ol' stress level????

Having been there many times in the exact same situations you describe, I certainly empathize. Which is also why I'm now a consultant.

Good luck this year!

[richard]

An approach I've taken at my firm (I'm an actuary) is to have the client make payment (after appropriate forms have been sent to and returned by the employee). We would only do this after complete year-end investment information is received, and generally (but not always) before employee information is received.

Assuming complete investment information is received, what is the risk about not having complete employee information?

If complete investment information has not bee received, sometimes (although I advise against this and charge extra), the client pays out (again with appropriate employee forms completed) something like 70% or 80% of last year's account balance, and makes up the difference plus/minus investment earnings later in the year. Other than the risk of greater than a 20% or 30% investment loss, what other problems does anyone see?

Finally, while I haven't done this, you could amend the plan document to provide that benefit payments cannot be made before the date the 5500 is filed for the year the employee terminates. In that case, you could provide the employee with the section of the plan document or refer them to the SPD, and simply say "these are the rules here in black and white."

Any thoughts?