Distribution Election Forms

[Guest Jennyb473]

How long are participant distribution election forms valid for? We have been using 180 days, but I want to confirm that is correct. Also, would that really mean if a distribution was processed and some time later the former participant receives more money (funding safe harbor or psp contributions in next plan year, etc) would you require a new distribution election or can you act on the original instructions even if it is older than 180 days?

We operate in a daily valuation environment and quite often have people take distributions and then get more money later and are trying to figure out the best way to handle the second distribution. In some cases there could be a year or more in between distributions - participant terms early in plan year and takes distribution but was due safe harbor or profit sharing that is not even computed until Feb/March of the next year and not funded until September. Is it ok to use the original form?

We are also trying to figure the best way to indentify these people. Those with small balances are easier to find because we run lists to determine who is under $1000 for mandatory distributions, but again, should we be paying them according to their original instruction or expect a new one and if none is received pay them in a lump sum? We use Relius Administration and there is a terminee w/residual balance report, but it seems to pick up rehires that have balances again and not always terminees with balances after a distribution has been paid. I'm going to work on a custom crystal report to add the "termination distribution processed" field to a report we use now with employee balances and term dates.

Thanks for the feedback!

[GMK]

Include in your cover letter or other notice and on the distribution form that the latest distribution election applies to any and all subsequent distributions unless the participant files a new form with different elections.

In addition, when a second (or third) distribution is to be made, I recommend sending a letter to the participant informing the participant of the distribution and of the fact that the distribution will be in accordance with her/his previous distribution form elections. Tell the participant to contact you if she/he would like to change her/his elections for this distribution. To those who choose to change their elections, send a new distribution form for them to complete and return.

IMO, the key is to inform participants (at the time when they need to make the decision) of their options and of what happens if they do nothing.

If you want to keep the 180 day limit on elections, put that information on the distribution form and in notices, so you have an answer for those who come back and claim they didn't know about it. For participants who become eligible for another distribution after 180 days, send them another distribution form for them to complete for that distribution.

[Bird]

We are using 180 days, and yes, paying additional amounts within that time frame without further papers.

[BG5150]

In my old job, we used 90 days, unless the time between the two crossed tax years.

I believe that this is a decent course to follow for a couple of reasons:

• If the original distribution was rolled over, the original IRA or QP may not be in existence any more, causing delays.
  
• The participant may have moved to another state, thus there may be a state tax withholding issue, if the first distribution was paid directly.
  
• The participant may be in a different tax and/or financial situation the next year, and it may impact where the person would like the money sent.
  

[Appleby]

I think the 180-days is the maximum period, because of the withholding notice requirement. If you provide the withholding notice separately from the form , then you may be able to use the form for a longer period if your internal Compliance rules permits it. If I remember correctly, you can send a withholding notice and assume a default election, if you do not receive a response from the participant within a certain timeframe.

Temp. Treas. Reg. § 35.3405-1T, Q&A d–9. Q. When is the payor required to notify the payee of his right to elect not to have withholding apply to a nonperiodic distribution?

A. Section 3405(d)(10)(B)(ii) requires that notice must be provided to the payee at the time of a nonperiodic distribution. Since notice provided at the time of the distribution could result in delay of receipt of the benefit check if the payee elects out of withholding, notice for nonperiodic distributions should be given not earlier than six months prior to the distribution and not later than the time that will give the payee reasonable time to elect not to have withholding apply and to reply to the payor with the election information. What is reasonable time depends upon the facts and circumstances of each case

[Guest Jennyb473]

thanks so much for your responses.

One question though, Appleby, when you mention withholding notice, I thought those were for distributions not eligible for rollover? We have a Special Tax Notice that goes out with the Final Distribution Election form that talks about distributions eligible for rollover being taxed at 20% (which cannot be waived) unless rolled over, etc.

[Appleby]

Good point Jenny,

I think the same 180 days would apply , as the rollover notice cannot be more than 180-days old. It used to be 90-days, which may explain why some of the plans mentioned above use 90 and some use 180.

See Section Vlll of Notice 2007-7 http://www.irs.gov/pub/irs-drop/n-07-07.pdf

[Guest Sieve]

Not only must the IRS 204(f) (rollover) and QJSA Notices not become stale (i.e., it must be distributed no more than 180 days prior to the annuity starting date), but, also, the go-stale date of the consent of the participant and/or spouse to the distribution has been extended so that the consent now cannot be more than 180 days old at the time of the comencement of benefit payments. (The IRS was directed by PPA '06 to make a change to the old 90-day distribution consent limit in its regs, but I don't beleive that has yet occurred--I think the reg change would include 1.417(e)-1(b)(3)(i). The new 180-day rule was effective for distributions in 2007 and after.)

[Guest TaxedToDeath]

Has anyone ever tried to "re-age" a stale consent and election form by sending new notices to the participant with a communication indicating that if the participant does not request to make a new election within 30 days, then distribution will commence as directed under the prior stale election form? Is that permitted under the PPA notice and consent rules?