Profit Sharing Plan - Participant Distribution Restricted to NRA - Oka

[Guest glhotdog]

Current client with a profit sharing plan which contains a distribution restriction for terminated employees of attainment of normal retirement age. Client is considering adding a Safe Harbor 401(k) Match provision. Our research has been unable to find an exception to the current distribution policy as applied to the Safe Harbor. Are we correct in telling the client the current distribution policy will apply across the board in the restated plan? Deferrals? Match? As well as the Profit Sharing Portion?

[jaemmons]

Plans may restrict distribution of benefits until a participant has attained NRA. This is a good way to ensure that a participant has some retirement benefits when they are 65 (or whatever NRA is), since most younger participants take taxable lump sum payments. However, unless the plan has a solid investment policy, which allows for participant investment direction, it may be best to change the timing of benefits when you restate, in order to appeal to the masses.

Keep in mind that distribution restrictions are sometimes looked upon as a negative for a participants.

[mbozek]

While a plan can always restrict distribution to attainment of NRA (if it applies to all participants) it really makes no sense because of the administrative costs involved in keeping the accounts of terminated participants in the plan. Every client I know will encourage withdrawals at termination to reduce admin fees which leads to the question is this client policy for the benefit of the participants or is it to benefit some thrid party who collects a fee base on the value of the plans assets?

[Guest BENEFITS STUFF]

In some instances, as a percentage of assets, certain fees are actually reduced based on the amount of assets in the plan. Also, having more assets in a plan often gives the settlors of the plan more options in "shopping" the plan to different service providers in order go get the best deal.

Of course, people could debate forever the "paternalistic" issue raised by jaemmons, but personally I think this is a valid concern. This is also a concern with post-EGTRRA terminations of money purchase pension plans. I have heard TPA's and others jokingly refer to the "bass boat phenomena" when a plan is terminated or distribuitons made upon severance of employment.