Timing of Distribution - Balance Forward plans

[Guest J. David Wright]

A plan uses balance forward accounting, end of plan year sole valuation date, no interest credit after valuation date, and provides for distribution of accounts as soon as administratively feasible following a one year break in service.

Accounting and other information necessary to complete the prior year valuation provided very late in the year resulting in filing of return at extended deadline. Valuation report, participant statements, and distribution packages sent shortly after 10/15 to plan sponsor for distribution.

People, particularly terminated participants move around and don't always leave their forwarding address with prior employers. Some participants are reluctant to pick up Certified mail not knowing there is money for them thinking it is a collection effort by a creditor. Mail time from the administrator to the client, more mail time from the client to the participant, Thanksgiving, then Christmas and it is year end again and another valuation date goes by, so the amount reported in the distribution package as of the prior valuation date is now incorrect and the participant has not completed all necessary election forms assuming the balance was in excess of $ 5,000. In previous years with constant market value increases, it usually meant the participants would be paid out on the prior year valuation and then the additional gain would be paid out the following year. That is until the market fell into full retreat. Asking a termianted participant who was paid out on the prior year balance to repay 20% to 50% of his distribution because he was paid after the next valuation date is a waste of time and effort. There is no discrimination in favor of HCE's and none of the effected participants are at NRA under the plan.

Since the plan distribution date provision reads: "Designated distribution. As soon as administratively practicable in the first plan year after participant incurs a one year break in service following the Participant's Separation from Service" does it seem reasonable the Regulators would claim the Plan Sponsor/Trustee failed to timely distribute assets to participants who had terminated and has breached his Fiduciary duty? Where does one find guidance on exactly what in included in "as soon as administratively practicable"? The Regulators are claiming subsequent distributions were based on an incorrect valuation date.

The problem lies in that the initial distribution election forms were for 12/31/2001 and unfortunately for the terminees, there was a significant decline in the value of plan assets between 12/31/2001 and 12/31/2002.

The Catch 22 is the terminated participants who were not paid before 12/31/2001 and were paid on 12/31/2002 account balances are complaining and calling the Regulators. If this group was paid after 12/31/2002 using 12/31/2001 balances, active employees would be complaining and calling the Regulators.

[Guest CharlieLaur]

Two separate issues here!

First of all, for the terminated participants who were not paid their vested interests by the end of the plan year (assume 12/31/2002), it would seem that your plan language would require that they share in the gains (or losses) for the 2002 plan year. To do otherwise would subject the plan to disqualification for failure to follow the terms of the plan.

Secondly, I am not aware of any specific guidance on the definition of "as soon as administratively practicable" --- this must be why they invented lawyers to argue such delicate legal points.

If there is going to be a problem, you may want to consider sending out the distribution forms before the annual valuation is completed with a notation that the actual value of the distribution will be based upon the value of the account balance as of 12/31/2001 (or whatever) so that, as soon as the valuation is completed, the distributions can be made for those participants who chose to return their forms.

We have also discussed adding a parapraph to the letters to the terminated participants indicating that the forms must be returned by a certain date (for example, December 15th) to insure distribution by December 31st.

Catch-22 --- great book and movie!!!

[Guest J. David Wright]

Thanks for the reply, Charlie. I was beginning to think no one was reading this thread.

I agree 100% on the gain/loss issue and so does the plan document which is very specific and states the Trustee must value the Trust Fund as of each Accounting Date to determine the fair market value of each Participant's account balance in the Trust. It also states, the Plan Administrator will allocate the net income, gain or loss pro rata to the adjusted Participant accounts. The allocable net income, gain, or loss is the net income or net loss, including the increase or decrease in the fair market value of assets since the last valuation date [not valuation]. That is clear to me.

The Administratively Practicable issue is one that I can not find any definition of either. We used the same procedure you suggested sending out distribution packages without specific dollar amounts and said in the form they would be paid out on the 2002 balance because of time constraints.

Since the original posting, we had a meeting with the EBSA Auditor and supervisor. Their position is that the distribution provision says the participants should be paid out in the first plan year following a one year break in service and completely ignoring the "as soon as administratively feasible" verbiage so they are claiming whether election forms were returned before the end of the plan year or not is immaterial and the plan trustee breached his fiduciary duty by not paying the participants out as required by the plan document.

Secondly, EBSA auditors are claiming the distributions made were based upon an incorrect valuation date [12/31/2002] and the participants should have been paid out on their 12/31/2001 account balance even though election forms were not returned until after 12/31/2002. They actually said it was their interpretation that the most recent valuation date meant the most recent valuation since the 12/31/2002 valuation had not been completed at the time the participant returned forms.

Strange position EBSA is assuming and an incorrect one according to the plan document.