Waiting period for final distributions

[Guest Luis G]

Is it permissable for an employer to withhold a final distribution for 3 months from the employee's termination date? If it is why is it so? Does the 60 day notice play into this type of restriction?

[Kathy]

It is very permissible for an employer to make distributions from a qualified retirement plan more than 3 months after the termination date of the employee. The employer is bound by the plan document which often states that distribution for participants terminated during the year won't be made until after the annual valuation for that year or even not until the participant has incurred a one-year break-in-service, which means it could be at least a year before you are eligible to receive a distribution from the plan. Congress has allowed for the tax advantages offered these plans in order to encourage people to save for their retirement. Therefore, the rules are geared more toward making it difficult for participants to get money out before retirement age. If you have concerns about distributions you should first read your Summary Plan Description and then, if you still have questions, speak with your employer about the plan’s distribution policies.

[Guest Luis G]

Is there a specific reg or section of the code which states employers can withhold a distribution for a certain time period?

[Dan]

Originally, retirement plans held retirement benefits until a participant reached Normal Retirement Age, usually age 65. While times have changed, this is still permissable if plan document so directs. In fact, this provision is common. Immediate payouts are a recent phenomenon.

A plan sponsor may make any provision for distributions, so long as the rules apply equally to all participants.

A plan that requires a 90 day wait following termination of employment provides a rapid payout. The plan sponsor does not benefit from keeping a participant's account in the plan for any length of time. There are reasons for requiring a time period.

They are providing time for the plan administrator (or firm) to verify accounts. Participants are unhappy if they receive a payout and then are notified they received too much and therefore must return money to the plan.

Retirement plans are not intended to be a savings account. As Kathy said, the idea is to make retirement plan balances difficult to get.

I am not aware of any regs that specifically adress distribution timing, other than assuring that the plan must evetually pay out each participant. As was said before, timing is subject to adoption agreement elections made by the plan sponsor. Please read, as Kathy suggested, your plan's SPD to concerning distributions. Then address your concerns to the plan sponsor.

[Guest gpr]

See IRS Code Sections 401(a)(14) and 401(a)(9) and 401(a)(11). Joint & Survivor and 70-1/2 rules notwithstanding, the plan can delay benefits until 60 days after the end of the plan year after the LATEST of the following events:

- participant attains age 65 or normal retirement age specified in the plan;

- the 10th anniversary of the date the employee started to participate in the plan; or

- the participant terminates with the employer.

The 401(k) Answer Book also adds "If permitted in the plan, the date specified in an election by the participant." It also notes the 1986 change to 411(a)(8).

Essentially, there is nothing legally prompting plan sponsors to pay out plan benefits immediately upon a participant's separation from service. However, many do because it may reduce plan costs and for other administrative factors. On the other hand, a company with a relatively high rate of rehire, for example, may find it more cost efficient to require a waiting period before paying out benefits. It just depends upon the demographics and circumstances of the company.

[Guest Luis G]

Thanks. All of your information has been helpful.

[Guest Steve Hample]

Further thanks - very thorough and clear explanations.