Distributions during plan termination

[Guest ksumner]

We are filing for a determination upon termination for a 401(k) plan. The sponsor would like to make distributions to terminated participants at this time. The company is still viable and these are participants that have been terminated for some time (nothing to do with plan term).

I don't think they should make distributions until the termination has been approved. This is the common sense approach. What is the legal approach?

[Dave Baker]

Heck, legally you could argue that the terms of the plan require distribution as soon as administratively practical (in the provisions re what happens upon plan termination) and that the document does not even permit the plan administrator to hold up distributions until a letter has been received ...

[Guest beth beaube]

I always advise my clients to wait until a determination letter is received. Although I do not have a cite handy, there is authority for waiting until a determination letter is received before distributions are made (even if it takes longer than a year if everyone has acted reasonably and a timely request to the Service was made). Many plan documents actually state that distributions on a plan's termination can be delayed until a determintation letter is received. Check your plan. Even if it is not in the plan, if an amendment is feasible, then simply amend the plan. If an amendment is not feasible, then I would still be comfortable with waiting for a letter.

Although I always recommend waiting, I have had clients that chose to make distributions anyway.

[Guest Rick Menson]

assume these are people who left and have a distributable event that doesn't deal with the plan termination. It is alright to go ahead with those distributions. If the distributions are the result of the plan termination then you would have to wait until you get your letter back if that is a condition that the trustee imposes. Remember you don't have to get a letter, it is only comfort. I have seen clients make distributions based upon an opinion on the termination. It really depends on what the trustee requires.

[david rigby]

Often the board resolution and/or plan amendment address (or should) the issue of applying for a letter. Therefore, the advice is "read your document".

[Guest P A Weick]

Does anyone have a citation for authority to withhold pending receipt of determination letter that beth beaube mentions? I have a case pending and am looking for guidance other than the common law prior to ERISA allowing a trustee to withhold distributions and go to court for instructions.

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[Guest TCAT]

The EP/EO Baltimore Key District Newsletter, April 1991, advised that distributions completed within six months after issuance of determination letter will be treated as being made as soon as administratively feasible.

Just finished a 401(k) termination and it took almost 10 months to get IRS letter. Still, we waited for letter prior to making any distributions as in remedial amendment period and wanted to make sure all documents were properly updated per IRS.

Is it administratively feasible to make distributions when qualification status is being requested from IRS?

[Guest beth beaube]

FYI - See GCM 39310 which discusses vesting issues in connection with employees who terminate employment prior to the termination of the plan. Although an employee may have terminated prior to the termination of the plan, you may have to 100% vest him/her anyway depending on the number of breaks in service the employee has had.

[david rigby]

another point might be to look at the trust agreement.

I had a trustee tell me recently that they (bank) have a policy that they will not serve as trustee for any plan that is not qualified. they extended this such that a qualified plan in process of terminating must apply for IRS determination letter or the trustee would resign.

The issue of timing is the original question though. Our firm (actuaries and consultants) always recommend waiting to pay until the IRS letter has been received. Also, every attorney or auditor I have ever talked to has agreed with this position.

Recently, we had a client terminate a DB plan and decided not to file with the IRS. We put our recommendation in writing and insisted on a written "hold harmless" letter from them.