What's the best way to remove the "discretionary profit sharing" accounts from a 401k Plan?

[Lynn Campbell]

In a 401k plan, what is the best way to remove the discretionary profit sharing accounts altogether? There will be no future discretionary profit sharing contributions, and we will 100% vest these accounts. The client wants to pay all participants their funds in these accounts to simplify recordkeeping. We could add in-service distributions using the "2-year rule" but that would not permit us to distribute all funds at this time. The 401k deferrals and matching contribution funds would stay in the plan and these contributions would continue. Thanks for all your input and ideas...

[QDROphile]

If you keep the 401(k) plan, you can't force participants to take the account funds until retirement age. See Treas Reg section 1.411(a)-11(e).

[Guest asire2002]

It may be more trouble than it is worth, but how about spinning off the portion of the plan consisting of ps contributions into a separate plan, terminating it and paying these amounts out? But, honestly, I'm not sure how the ps piece creates any administrative complexity, particularly if no additional contributions of that sort will be made -- it is the 401(k) side of things that requires most of the work. Why not just add the in-service withdrawal provision and let participants decide whether they want to take the money?

[david rigby]

Why would you want to do this? Negatives:

- administrative expense of the distributions,

- remaining ongoing expenses will probably be higher as a percent of total funds,

- undesirable precedent of early distribution of funds otherwise earmarked for retirement,

- lessened bargaining power for the plan since total funds will now be reduced.

[QDROphile]

asire2002:

How do you read Treas. Reg. section 1.411(a)-(11)(e) to allow what you propose?

[Guest asire2002]

QDROphile, thanks for pointing that out. I must admit I had forgotten about/overlooked it. And I agree that it makes it difficult (i.e., impossible) to force participants out in cash if their balances are above the cashout amount, but I imagine you could still purchase annuity contracts and get rid of them that way. In rereading the post, it seems the problem isn't so much that participants won't want to take their money, but perhaps that adding an in-service withdrawal for amounts that have aged two+ years wouldn't account for all of the p/s money. If so, maybe another solution would be to allow in-service withdrawals of all p/s amounts that are fully vested (since they are prepared to fully vest the p/s amounts). I do not believe that the aging rule is the only way to permit p/s money to be withdrawn -- any specified, objective criteria will do.

[QDROphile]

I think you best addressed the more imporatant big picture question. What is it about those accounts that motivates efforts to get rid of them? And what about the effects on morale?

[Lynn Campbell]

QDROphile - morale aside, would it be permissible for the criteria for an in-service distribution to be one of these: all accounts that are fully vested (we would amend the Plan so that all accounts would be fully vested) OR upon attainment of an age such as 25 or some other age that would include every affected participant? Thanks for all input!

[QDROphile]

Are you asking about a provision that allows the participants to elect a distribution or a provision that requires the amounts to be distributed?

[Lynn Campbell]

I am asking about an in-service distribution provision. I realize we cannot force payment of the $$. Thanks.

[QDROphile]

You can provide for in service distributions of the profit sharing amounts in accordance with the rules for profit sharing plans, disregarding the special rules for elective deferrals under section 401(k). We have some guidance about the acceptable standards and you appear to be familiar with the guidance (e.g. the 2 year seasoning rule).

I have seen age 40 approved by determination letter, but I would be uncomfortable with an attempt to get around the standard 2 year seasoning rule with the alternative of age 25 or or the alternative of vesting. If vesting does not occur until after 2 years, that would probably work, but special accelerated vesting is too aggressive for me. You could try something aggressive and see if you can get a letter.

You are trying awfully hard to accomplish what seems to be an unimportant goal.

[chris]

May be missing the point but what's the problem with having the in-service distribution keyed to age 25?

[Lynn Campbell]

That was my attempt at including all the participants in the group eligible for in-service distributions, so I could at least theoretically pay them all off - assuming each participant consents as required. Thanks!