Change of the Timing of Distributions

[John Feldt ERPA CPC QPA]

A 401(k) plan has an immediate distribution option for terminated participants, regardless of any other factor. To be eligible for a distribution, they are hoping to change the plan:

A. to require 5 one-year breaks in service, with the exception of reaching Normal Retirement and mandatory cashouts. But, if that is not an option, then instead:

B. to require the payment to be delayed until the first quarter after the plan year in which the participant terminates, again with the same NRD and cashout exceptions.

Can (A) be done to affect all accounts of all participants now (actives and term vesteds alike)? What about (B) instead? Or would current accounts retain a right for immediate distribution upon termination of employment?

[MWeddell]

Neither (A) nor (B) are permitted. Regarding why (B) doesn't work, see Treas. Reg. 1.411(d)-4, Q&A-2(b)(2)(ix) which allows de minimis changes in distribution timing of up to two months but your (B) proposal would change timing by 3-14 months.

[John Feldt ERPA CPC QPA]

Yep, that's what we found, but we hoped there was another solution that we missed.

Reg. §1.411(d)-4, Q&A-2(b)(2)(ix)

(ix) De minimis change in the timing of an optional form of benefit. A plan may be amended to modify an optional form of benefit by changing the timing of the availability of such optional form if, after the change, the optional form is available at a time that is within two months of the time such optional form was available before the amendment. To the extent the optional form of benefit is available prior to termination of employment, six months may be substituted for two months in the prior sentence. Thus, for example, a plan that makes in-service distributions available to employees once every month may be amended to make such in-service distributions available only once every six months. This exception to section 411(d)(6) relates only to the timing of the availability of the optional form of benefit. Other aspects of an optional form of benefit may not be modified and the value of such optional form may not be reduced merely because of an amendment permitted by this exception.