Restrictions on Plan Distributions

[Guest arasalin]

A multiemployer money purchase DC plan (no individual accounts, investments by plan trustees) values participant account balances quarterly, but distributes benefits upon receipt of an application, at any time (not just on valuation dates, even though there is no ability to value account balances between valuation dates), and distributes the account balance based on its value on the valuation date following the retirement of the participant.

Practically, what this has meant is that the participant gets his account balance as soon as practicable after a complete application is submitted, and a proportional share of investment gains occurring between the valuation date preceding the distribution until the date of distribution and less the proportional admin fee.

Of course, in a down market, this means that participants get a full distribution of the account that may have dropped in value between the preceding valuation date and the date of distribution, and the plan is out the difference. To remedy the problem, we would like to either (1) restrict distribution dates to valuation dates and require that the application be submitted no later than 15 days before the valuation date upon which it is to be distributed or (2) stagger the payout on distribution to 75% as soon as practicable after application and 25% as soon as practicable after the next valuation date.

I tend to believe that the plan may restrict times for distribution (while retaining all required benefit forms) without violating 204(g) and the 411(d)(6) restrictions on eliminating benefit options, but am unsure if the staggered distribution option also meets the requirements. Any opinions?

[J Simmons]

Prior to the change being considered the former employee could elect payout whenever during a calendar quarter (by timing his/her submission of a completed application) and if the change is implemented, the former employee's ability to do would be restricted. That raises the concern of whether this would be a protected benefit. However, excepted from being a protected benefit are, among certain other items,

(9) administrative procedures for distributing benefits, such as provisions relating to the particular dates on which notices are given and by which elections must be made; and (10) rights that derive from administrative and operational provisions, such as mechanical procedures for allocating investment experience among accounts in defined contribution plans.

Treas Reg § 1.411(d)-4, Q&A-1(d).

If you yet have that nagging concern, consider also adjusting for 'a proportional share of investment losses occurring between the valuation date preceding the distribution until the date of distribution'.