Distributable Event

[Guest Thornton]

The four key employees of a client of ours want to take distribution of their deferral and match balances and roll the proceeds to individual IRA's to make investments not offered by the plan. We advised them that such distributions are not permitted since there has not been a distributable event. We discussed directed brokerage accounts as a possible solution. They mentioned to us that they would "quit" and get rehired. (Remember, they own the company!) We advised them that this action would not create a distributable event.

Today, we received distribution forms for all four employees with a 7/13 termination date. We called the company because the forms were incomplete and learned that the four have already been "rehired". As TPA, we feel it is our obligation to refuse to make the distributions.

1) If the client demands that the distributions be made and fires us, or we resign, do we have an obligation to notify the DOL of the violation?

2) If the distributions are made, what are the possible ramifications to the plan and/or the four participants other than plan disqualification? What about the IRA sponsors?

3) Am I being overly cautious?

Thanks.

[Mike Preston]

There are so many reasons to run from this client right NOW that a single post on this bulletin board could not possibly cover all of them. You are certainly not being overly cautious. The main point you have not mentioned is that IF this gets picked up and the plan ends up with a disqualification, you can bet your life that the four owners in question will look back to the day you allowed this to happen with a very selective memory. They will then proceed to rationalize that you and your firm should have absolutely told them not to go forward and they will sue you and your firm for damages. You just don't need that kind of client. Cut them loose.

You are under no legal obligation to report them, that I am aware of. It is a much more interesting discussion to wonder if you are ethically bound to report them. Ethics are a personal matter, so there is no one answer. But if their actions could cause serious harm to others (such as disqualifying the entire plan) then I wonder what your ethics demand in that circumstance?

[austin3515]

I'm not sure you can report them for wanting to do something. If you fire them as a client, you will never really know whether or not they did this terrible thing. Reporting them, in my opinion, would be unethical, because they may indeed come to their senses based on their firing and not go through with this sham termination.

But I could not agree more that this is not worht whatever the fees.

[MARYMM]

The four key employees of a client of ours want to take distribution of their deferral and match balances and roll the proceeds to individual IRA's to make investments not offered by the plan. We advised them that such distributions are not permitted since there has not been a distributable event. We discussed directed brokerage accounts as a possible solution. They mentioned to us that they would "quit" and get rehired. (Remember, they own the company!) We advised them that this action would not create a distributable event.

Today, we received distribution forms for all four employees with a 7/13 termination date. We called the company because the forms were incomplete and learned that the four have already been "rehired". As TPA, we feel it is our obligation to refuse to make the distributions.

1) If the client demands that the distributions be made and fires us, or we resign, do we have an obligation to notify the DOL of the violation?

2) If the distributions are made, what are the possible ramifications to the plan and/or the four participants other than plan disqualification? What about the IRA sponsors?

3) Am I being overly cautious?

Thanks.

How old are they ? Would an amendment to allow an in-service distribution for age 59.5 work ?

[Kimberly S]

Since they have already been rehired, their window of opportunity to take the withdrawal appears to have closed before the the distributions were processed. They're back to not being able to take a distribution while they are employed (or re-employed in this case).

[jpod]

I have the impression that this is a small plan not subject to the audit requirement. If I'm wrong, perhaps you can tell them that they will never get a clean audit report and that will put the fear of God into them.