Is this cutting back a protected benefit?

[Jim Chad]

Doc says distributions are as soon as administratively feasible after the next valuation date. It was set this way when there were quarterly valuations. Then they went to a daily platform for a few years.

They decided they did not like the higher costs, so they switched to one big trustee directed account.

Valuations will be done annually. I sure would like to hear opinions. Is this a cut back on distribution options if the document is left the same?

[four01kman]

"Doc says distributions are as soon as administratively feasible after the next valuation date."

By changing to an annual valuation date and distributing thereafter, it seems you are doing nothing more than following the terms of the document. The law requires distributions no later than the occurrence of certain events, none of which have anything to do with the current valuation date, and I do not believe a distribution after a particular valuation date would be a protected benefit.

[ERISAnut]

Jim,

For what it is worth, I agree with four01kman. The document in question clearly had the option of selecting as soon as administratively feasible after termination, but instead referenced another event.

[Kevin C]

I disagree. Changing to an annual valuation date is also changing the timing of the distributions. Distribution timing is a protected benefit. You are talking about more than a de minimis change (2 months), so you would be violating the anti-cutback rules.

There is a recent similar thread that includes a cite.

[Guest Sieve]

I disagree with Kevin. Valuation dates are not 411(d)(6) protected. (Treas. Reg. Section 1.411-4, Q&A-1(d)(8).) The plan doesn't provide that distributions are quarterly, just that they relate to valuation dates. And, when the non-protected valuation dates change administratively, then the timing of distributions also changes.

[Jim Chad]

Thanks, everyone.

Kevin and Larry: What both of you said makes perfect sense to me.

Since both positions are reasonable, I am thinking I won't get into much trouble.

I think the only way this could come up in the future is if someone wants a distribution, I say they can't have it and they call the DOL. Then I explain the situation and do whatever the DOL says. What do y'all think of this?

[Kevin C]

Yes, Valuation dates are not protected. The protected benefit here is the optional form of benefit. The optional form of benefit includes the timing of the payment of the benefit.

1.411(d)-4 Q&A 1(b) Optional forms of benefit --(1) In general. The term optional form of benefit has the same meaning as in §1.411(d)-3(g)(6)(ii). Under this definition, different optional forms of benefit exist if a distribution alternative is not payable on substantially the same terms as another distribution alternative. Thus, for example, different optional forms of benefit may result from differences in terms relating to the payment schedule, timing, commencement, medium of distribution (e.g., in cash or in kind), election rights, differences in eligibility requirements, or the portion of the benefit to which the distribution alternative applies.

The only change you can make to a lump sum optional form of benefit is a de minimis change in the timing.

1.411(d)-4 Q&A 2 (b)(2)(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.

Also, look at Q&A 7:

Q-7: May a plan be amended to add employer discretion or conditions restricting the availability of a section 411(d)(6) protected benefit?

A-7: No. The addition of employer discretion or objective conditions with respect to a section 411(d)(6) protected benefit that has already accrued violates section 411(d)(6). Also, the addition of conditions (whether or not objective) or any change to existing conditions with respect to section 411(d)(6) protected benefits that results in any further restriction violates section 411(d)(6). However, the addition of objective conditions to a section 411(d)(6) protected benefit may be made with respect to benefits accrued after the later of the adoption or effective date of the amendment. In addition, objective conditions may be imposed on section 411(d)(6) protected benefits accrued as of the date of an amendment where permitted under the transitional rules of §1.401(a)-4 Q&A-5 and Q&A-8 of this section. Finally, objective conditions may be imposed on section 411(d)(6) protected benefits to the extent permitted by the permissible benefit cutback provisions of Q&A-2 of this section.

You can change the valuation date to annual and pay distributions based on the balance on the valuation date preceding the distribution date, but the timing of the distribution is protected. To me at least, the regs are pretty clear on that. You can change the timing for benefits not yet accrued, but not for existing balances.

If you have been paying distributions soon after termination, the current employees know that. The first time you deny immediate payment, someone will be unhappy. Whether or not they contact the IRS and/or DOL depends on their personality. Personally, I don't enjoy IRS and DOL audits, so I try to avoid actions that dramatically increase the changes of having one. We had a DOL audit of an annually valued plan last year because a participant complained to the DOL that it was taking to long for him to get his distribution. We ended up with a no changes letter, but only after a prolonged disagreement with the agent over the timing of the deferral deposits.

Sieve, ERISAnut and four01kman, how about if the plan only allowed payment at your normal retirement date and defined NRD as the 55th birthday. Could you amend to change the NRD to age 65 and require everyone with existing balances to wait until 65 before they can get paid?

[ERISAnut]

Thanks, everyone.

Kevin and Larry: What both of you said makes perfect sense to me.

Since both positions are reasonable, I am thinking I won't get into much trouble.

I think the only way this could come up in the future is if someone wants a distribution, I say they can't have it and they call the DOL. Then I explain the situation and do whatever the DOL says. What do y'all think of this?

Your position seems pretty reasonable. Hard to imagine an employee terminating and requesting immediate distribution of funds based on an argument that he previously had an option of terminating and receiving immediate distribution. But, in the event it does, you always follow the written terms of the plan.

In the unlikely event the employee challenges the cutback issue, it will likely be with the IRS; not the DOL. The DOL will only challenge when employee rights under the written plan aren't being enforced, where the IRS will have to address whether the actual plan language or amendment timing will be an issue.

But in all, I agree with your approach. I am also with Sieve (and four01kman) on this one.

Sorry Kevin, you jumped in ahead of me prior to my post. Our disagreement is based on a frame of reference (i.e. date of termination or first valuation date following date of termination). The assessment of whether a change in the timing has occured would be based on a starting reference point. Our argument is that the starting reference point is not termination of employment, but instead the first valuation date following the termination of employment. With this application, the distribution timing did not change.

[ERISAnut]

Also, to answer the question, regarding Normal Retirement, I think this itself is a protected (but only with respect to the benefits that are tied to it). The valuation date (itself) is not protect, neither are the benefits tied to it (meaning benefits that use it as a reference point).

[Kevin C]

But, in the event it does, you always follow the written terms of the plan.

Sorry, but I have to disagree, you follow the terms of the plan to the extent they are consistent with ERISA. See ERISA 404(a)(1)(D). The anti-cutback rules are also in ERISA 204(g).

The question here is whether or not the distribution timing is being changed. You are arguing that it is not, because the timing is still the same period after the "Valuation Date" even though the definition of "Valuation Date" was changed. I disagree. Termination of employment is the distributable event. The timing of the distribution in relation to the distributable event is being changed. If you can change the timing of distributions merely by changing a definition in the plan, then the anti-cutback rules relating to optional forms of payment make no sense.

What if the plan document said distributions are payable as soon as administratively feasible following the end of the calendar quarter in which the participant terminated employment? Do you still think they could change to annual distributions?

[Belgarath]

How can you possibly make distributions BEFORE the valuation has taken place, in a plan that doesn't have daily recordkeeping? I agree with Sieve (and others) - I don't see this as an impermissible cutback.

[Guest Sieve]

Kevin --

In line with Belgarath's post, here's another way to look at it and perhaps a way to administer the plan more in line with your thoughts concerning potential cutback: when a participant terminates, the distribution can be as soon as possible after the LAST annual valuation if that is what the participant elects. That certainly is not changing distribution timing--just the valuation date--and it is permitting the participant to receive a quicker distribution if desired, just at last year's value.

It gives people a chance to play the market, however--as does any non-daily valued plan--and that's not a good idea in this environment. Some of us, of course, remember when there was no such thing as a daily-valued plan, but we made do somehow.

[Kevin C]

Belgarath, You misread my post. I said the distribution amount is based on the valuation date preceding the distribution date. i.e. a distribution paid in 2008 from an annually valued calendar year plan is based on the 12/31/2007 vested balance. Neither the valuation date, nor the allocation date for gains/losses are protected. The timing of the distribution, however, is protected because differences in timing results in different optional forms of payment.

Sieve, we still have annually valued plans and they still work the same way they always did. As you pointed out, there are disadvantages to annual valuations.

No one has addressed my question:

What if the plan document said distributions are payable as soon as administratively feasible following the end of the calendar quarter in which the participant terminated employment? Do you still think they could change to annual distributions?

[ERISAnut]

Termination of employment is the distributable event. The timing of the distribution in relation to the distributable event is being changed. If you can change the timing of distributions merely by changing a definition in the plan, then the anti-cutback rules relating to optional forms of payment make no sense.

What if the plan document said distributions are payable as soon as administratively feasible following the end of the calendar quarter in which the participant terminated employment? Do you still think they could change to annual distributions?

That is the point. The plan certainly had the option of stating hard-fast dates such as 'date of termination', 'end of calendar quarter', 'end of plan year', but didn't. It stated 'the next valuation date following' the termination of employment. When using this terminology, then the valuation date is the reference.

Now for your argument, suppose the plan is written to say the end of plan year following termination, and you change the plan year end from June to December. A participant who terminates in May would have a claim under your argument to receive their distribution in June because it was previously a plan year end. Would that make sense? Probably not.

This is why the reference to the events (plan year end, next valuation date) that are not protected do not cause a prohibited cutback. There would be no reasonable uniform application, because there would alway be a situation where a detriment could be argued.

[Kevin C]

I have a better hypothetical.

The plan is a calendar year plan and the valuation date is quarterly. Distributions are paid as soon as feasible following the valuation date on or after termination of employment. I terminate employment on 3/1/2008. I receive my distribution paperwork on 4/15/2008, but I haven't done anything with it. The Plan is amended effective 5/1/2008 to change the valuation date to the last day of the plan year (i.e. annual valuations). When can I get paid?

[Kevin C]

ERISAnut, this time you posted while I was writing.

I think we will just have to agree to disagree. I don't see that creative wording should let you be able to do something that is otherwise prohibited by the regs. I am still curious to see how you would answer my last post.

As for your plan year end distribution timing example, that is a good one. But there are differences. The short year 7/1 - 12/31 introduces another distribution date that is earlier than provided under the old plan provisions. Also, the change speeds up distributions for some, but delays it for others. Changing the valuation date to the end of the year would result in either the same or later distribution depending on the termination date.

[ERISAnut]

Damn,

I see your point. At the time in question, the termination had already occured; and therefore the right to receive a distribution is arguably set in stone. In this case, I would agree with you as this is more of an issue of amendment timing to take away something that is already in process.

My argument (I may not be able to speak for others) is that the when termination of employment is not made with the expectation of a distribution being available, then there is not a prohibited cut-back issue. Amendment timing appears to be an additional consideration for non-discrimination and taking away benefits.

But, let's take this further. Suppose the participant has completed a request for a loan or hardship, and the plan is amended after the requested has been received? This is the same scenario. It would be more of an amendment timing issue rather than a cut-back issue.

For what it is worth, I like the way you think.

You also posted while I was typing this one. But, yes, we will agree to disagree while knowing exactly what we disagree on.

[Kevin C]

But if the distribution timing in relation to the distributable event is not protected, the right to a distribution is not set in stone. Why would a terminated participant be any different from an active one? It's either protected for all or for none.

Loans and hardships are another matter. They are specifically listed as not being protected benefits. For PR reasons, I wouldn't want to eliminate them while one was in the works.