Change in valuation date

[Guest tws]

Terminated employee applies for benefits. Application says account balance will be valued as of preceding plan year end (April 30). Application submitted in July 2002. Employee told that Plan has been amended and account balance will now be valued as of end of month in which application was received (July 31). Account balance on July 31 is $18,000 less than it was on April 30. Employee had no notice of Plan amendment until application submitted. Does he have any recourse? What if the amendment was adopted after he submitted his application?

[QDROphile]

If the change was based on an intelligent plan document and done properly, there is no viable claim. If the usual sloppiness applies, it will still be almost impossible to win and the participant will have to have more to say about it than than "waaah." A more reasonable question is whether or not the participant will be given the opportunity to rescind the distribution election, assuming the the change in valuation date is legitimately a surprise to the participant.

[jaemmons]

I think the terminated employee has a legitimate claim for his 4-30 account balance. There are a few court cases in which this exact situation occurred and the court sided with the terminated participant (Pratt vs. Petroleum Production Mgt. Inc. Employee Savings Plan & Trust , No. 88-2190(10th Circuit 1990) and Wulf vs. Quantum Chemical Corp., 1994 6th Circuit, US Appellate Lexix 14677) Their rulings were based upon the fact that a defined contribution plan's accrued benefit is the value of the account balance on the first valuation date following termination of employment. Even though the plan timely amended to allow for more frequent valuation dates, the court held that the participant's account balance could not be reduced by a retroactive amendment adopted after their termination date because it constituted an "accrued benefit" which is a protected benefit under IRC 411(d)(6).

[Guest FREE401k]

This may not help, or you may have already done this, but in situations like this we find it can help to think about how we would handle the issue if the account value had gone the other way (in this case, if the account had increased $18,000). I'm not saying that the correct answer to this dilemma depends on which way the account changed, I'm saying that separating the change in the account value from the issue can make the issue clearer to everyone involved (including the participant).

[jaemmons]

But unfortunately it doesn't resolve the fact that the participant's accrued benefit was reduced. I think the employer would have a reasonable argument the other way if they decided to pay the 4-30 balance even though it was higher at the time of application because there wasn't any cutback in their accrued benefit at the time of termination.

[Guest FREE401k]

Investment earnings aren't a benefit that can't be cutback, are they?

[QDROphile]

The Wulf decision has critically different facts and rules on a different question. The Pratt decision does cover the same question, but I think the decision is questionable. Still, when arguing with the plan it is far better than the "nothing" I offered.