Participant directed accounts

[Guest pjb]

Are there any problems if a plan forces all account balances of terminated employees to be invested in a separate account earning fixed interest upon termination of employment while all active participants maintain the right to direct their investments?

[mbozek]

Yes - it is a violation of IRC411(a)(11) which requires consent of terminated participants with balances in excess of $5,000 to a distribution. reg 1.411(a)- 11©(2) states that consent is not valid if significant detriment is imposed on participant who does not consent to a distribution. IRS issued a rev rul. on this issue a few years ago.

[Guest pjb]

Sorry I was unclear, the separate account remains within the trust. The money is not distributed.

Here is plan language under "distributions upon termination of employment": "The Trustees shall place the value, at Plan Year end, in one or more federrally insured bank or savings and loan account in the name of the Trust in trust for the named employee. The account and all accumulated interest shall be paid to the employee at the time he retires under the provisions of the Federal Insurance Contributions Act."

[E as in ERISA]

Your plan is imposing a significant detriment to those who don't take a distribution -- it is being invested in an interest bearing account. Therefore, participants are being forced to consent to distribution. So the consents are invalid. So the plan does not meet the requirements of 411(a)(11). (I think that is what mbozek was getting at?)

[Guest pjb]

Oh, I see what you're saying. Thanks.

[KJohnson]

I agree with the above--I think the Rev. Rul that mbozek is referring to is 96-47 .

The IRS' position gets real interesting in the ESOP context where many plans of closely held corporations "disinvest" all terminated participants in company stock and put those participants into more conservative investments pending pay-out. If you are interested in a "sprited" discussion on this issue and the 411(a)(11) implications you can look at this link.

http://benefitslink.com/boards/index.php?showtopic=5893