Drawbacks of Allowing In-Kind Distributions

[chris]

Any drawbacks to allowing participants to opt for in-kind distributions where the trustee oversees the investment of the general plan assets, i.e., no directed investment accounts? Employer is considering allowing for distributions to be in cash OR IN-KIND, instead of in cash only. The election is to be made by the participant. Any negatives to allowing for in-kind distributions in this situation?

[maverick]

Who decides what assets are distributed in-kind to Joe Six-Pack? If there are 50 mutual funds and 100 stocks do you give Joe a pro-rata share of each?

Will the plan document have to be amended to allow in-kind dists?

More coordination involved as opposed to just liquidating some investments and cutting a dist. check.

[QDROphile]

How are you going to handle withhholding if the participant specifies 100 percent in-kind distribution? How about direct rollovers? I bet some participants won't check to see if the recipient eligible plan will accept in-kind rollovers. Will you allow a split between in-kind and cash? It is a lot more complication, and for what? The participant can take the cash and buy the investment the participant wants.

[Kirk Maldonado]

If they get an in-kind distribution of employer stock, you need to track the basis of the shares for purposes of the tax treatment on Net Unrealized Appreciation.

[mbozek]

In kind distributions are not suitable for plan interests in RE or privately held investments such as LPs, mortgages and non publicaly traded securities because few IRA custodians will hold such interests and most plan trustees will not permit such investments because of fiduciary issues ( e.g., the asset must be prudent). The RE interest can only be distributed as a certificate which has no current marketability and will have to be redeemed. Also privately held interests must be valued once a year by the issuer. From an administrative point of view, in kind distributions are much more work because the administrator must procure the indicia of ownership from each security to be distributed instead of giving instructions to the custodian to cash out shares and issue a check after taking out withholding.