Balance Forward - Revalue for Distribution

[Guest Factor]

We have a client with a balance forward (calendar year) profit sharing plan. Due to the adverse market conditions, and the fact that a participant whom they dislike needs to be paid, they want to revalue the plan at this time. Of course, they have never done this when the market was up. While we have advised them against this, does anyone have anything specific that would help me convince them that this is not a good idea?

[Bird]

It may be a good idea. I think it depends upon the participant's account relative to the size of the plan as a whole, and of course the loss in question. But if it is a significant account and there's no interim val, then the remaining participants will suffer greater losses as a result of this participant's account not being allocated its "fair" share. I wouldn't assume that just because gains have not been revalued means that this loss can't be - I'm not saying that past practices are totally irrelevant either, but if participants are usually paid out in March or April and this one is September (or October or...) then those other payouts aren't that significant to me.

[JanetM]

What does the plan say? Does the plan specify that the valuation (val) is done annually? Does if allow for updated val at plans sponsors discretion? If yes, you can and should update the val. If the plan does not say how often the val is done, does is mention anything in distribution section?

You need more advice, specific to your plan language. You have to balance between your fiduciary responsibility while ensuring you are not singling one idividual out for special (different) treatment.

I agree with Bird, if all the prior distributions were done just after val, early in the following year that isn't the same as paying out in Sep or Oct.

[Guest Sieve]

As JanetM mentioned, there first are some administrative issues: Does the plan allow the valuation date to be other than at year-end? Can the administrator (employer) request a special valuation or change the valuation date, or will the plan have to be amended?

As to convincing the client not to do it . . . The valuation date is not a protected benefit (Treas. Reg. Section 1.411(d)-4, Q&A-1(d)(8)). And, I don't think it's an optional form of benefit that must be non-disriminatory, since there is only one lump-sum benefit option (the valuation date therefore being irrelevant). The only thing I can come up with is whether the timing of this amendment to the valuation date is discriminatory (facts & cuircumstances), but the rules require it to be a plan amendment (& not an administrative determination). I'm sure there are some other creative theories that could be tried by potential litigants.

Here's one approach to the timing issue you describe which I've been involved in. The plan was amended to require a distribution to be paid out only at the value as of the next end of year valuation date, and then only if the request for distribution preceeded that valuation date. Terminations during the first half of the year can be paid out as of the prior valuation date only if a request for distribution is made within a month of termination of employment. This is all to prevent timing the distribtuion to the market, primarily as to those who have long since terminated but not yet taken their $$.

[GMK]

Things to consider ...

Assuming the plan document properly allows the plan administrator to determine additional valuation dates, the cost of the valuation may be relevant, since it reduces the value of the company (maybe not by much compared to the reduction in the amount to be distributed).

Agreed that early in the year distributions are not the issue. Past practices has more to do with how any Sept. Oct. distributions in previous years were handled (like when the market was up late in the year).

[R. Butler]

Has the terminated employee already requested the distribution? If the value is a significant, I'd be inclined to consult legal counsel. There are court cases on both sides of this issue.