Distribution was based on incorrect valuation date, then investment losses occur.

[katieinny]

A retirement plan permits retirees to take distributions immediately after retirement rather than waiting for the next valuation date. We usually recommend that less than 100% of the balance based on the prior valuation be distributed just in case there are losses. However, this client permitted 100% of the balance to be distributed based on the prior valuation. Now the next valuation has been completed and they discovered that there was a substantial loss. Naturally, the participant is not going to return the money. Is the employer obligated to make the plan whole?

[Blinky the 3-eyed Fish]

I am not sure I understand fully. Did the distribution take place after the valuation date passed, but before the work could be done? If that is the case, then the plan does need to be made whole, but contacting the participant is the first option. I believe Rev. Proc. 2003-44 deals with such a situation.

Now, if my scenario wasn't the case then I believe you have issues. Because there is no way a participant can be entitled to a distribution, but the distribution amount is not determinable at the time the distribution is taken.

[sloble@crowleyfleck.com]

If the distribution timing followed the plan terms, then arguably no. But I think the exposure is in the past practice of waiting until the next valuation date to complete the distribution. Regardless of how this is handled, the employer might consider amending the plan and making its practice more consistent to avoid related problems. See eg, Dewitt 106 F3d 514 (3d 1997) (holding that a plan that distributed benefits "too early" in view of plan terms breached fiduciary duty when there was a gain after the distribution date).

[mbozek]

How does the plan define the amount that is to be distributed to a Participant on a distribution date? Is the fmv of the account on the last valuation date? Is it the fmv on the date of distribution?

[katieinny]

My apologies for my delayed response. I've been on vacation, but back in the real world now.

Blinky was correct -- the distribution took place after the valuation date, but before the work was done, so they used the numbers from the prior valuation. The employer is upset with the TPA for not alerting him to the issue. Of course, now that this has happened, the employer is taking steps to make sure it doesn't happen again, but in the meantime, we're saying that he needs to make the plan whole.