Distributions to terminated participants

[Lori H]

we are having an office dilemma.

For restatements distributions to terminated participants have several options, one being the distro can occur as soon as administratively feasible after the participant terminates. Another option is the distro may occur as soon as administratively feasible after the close of the plan year in which the participant terminates. The latter option allows for possible miscalculated matching funds to be deposited into the terminated part account and results in only one distro to the part rather than multiple under the former option. However, some of the plan administrators are going ahead and paying them out prior to the close of the plan year and not in accordance with the terms of the plan, which says "as soon as administratively feasible after the close of the plan year in which they terminate". For EGTRRA we are thinking of switching to as soon as administratively feasible after the participant terminates. That may allow the sponsor more flexibility. THOUGHTS?

[Guest Sieve]

Using "ASAAF" permits a distribution immediately if, for example, there is no match or non-elective contribution for the year, or if either one will not be allocated to the terminated employee due to an end-of-year requirement that obviously will not be met, and the participant therefore can be eliminated from the plan prior to year-end (and will not count towards next year's audit requirement). That's the provision I find most often and, I think, is preferable to "after the end of the year" (which I think is a hold-over from non-daily valued plans, and should only be used by those plans).

[david rigby]

If there is pattern of rehire, ASAAF may not be advisable.

[Bird]

Thoughts-

I don't see how paying as soon as administratively feasible gives more flexibility; it is what it is.

In our (small) market, we do a lot of safe harbor plans and also might have to share employer contributions with term'd employees due to 410(b). We prefer, strongly, to wait until after the end of the year in those cases (and in general, just for the chance to reconcile 401(k) contributions and otherwise let the dust settle). I don't have a problem telling a whining/threatening participant "it's a retirement plan, not a savings account, be glad you don't have to wait until your normal retirement date." End of year payout is in some ways a holdover from balance forward vals but there are other reasons for wanting to wait.

I think it's more common to have immediate payouts in larger plans, and as long as the provisions are such that it is unlikely at best that a participant will be entitled to additional money, it's not so bad to pay immediately.

[Lori H]

Thanks, what sort of ramifications do you think could arise if a plan administrator had the "pay as soon as administratively feasible after the close of the plan year" provision in the plan but went ahead and paid the participant shortly after termination? it seems as if this provision would be strictly for the benefit of the plan sponsor meaning they would have a more definite idea of when distributions would occur (after the plan year) as opposed to paying terms out throughout the course of the year.

[Bird]

Thanks, what sort of ramifications do you think could arise if a plan administrator had the "pay as soon as administratively feasible after the close of the plan year" provision in the plan but went ahead and paid the participant shortly after termination? it seems as if this provision would be strictly for the benefit of the plan sponsor meaning they would have a more definite idea of when distributions would occur (after the plan year) as opposed to paying terms out throughout the course of the year.

If you're asking about something that's already happened, I would just not do it any more and move on (or amend to permit immediate distributions if that's what you want). If you're asking if it is ok to have the provision in place but pay participants early anyway, I wouldn't do it.

[Below Ground]

Just wanted to add a word of support to the position of Bird. Small firms have issues like cash flow that might not be as important to a large company Holding off until all contributions are deposited allows for a benefit to be processed only once; thereby reducing costs of the Plan. I really don't think that a blanket conclusion on this topic is appropriate. One needs to look at the plan sponsor and apply a design that work for that firm given the objectives held for the plan. Then, make sure that people are clearly notified on timing parameters before they start. Is the plan for retirement, or is it a short term savings account? The bottom line is that the plan terms should allow for the best retirement plan given the capabilities of the plan sponsor.

[GMK]

... if a plan administrator had the "pay as soon as administratively feasible after the close of the plan year" provision in the plan but went ahead and paid the participant shortly after termination?

I think I heard or read somewhere that plan qualification depends on administering the plan in accordance with the provisions of the plan document. I'm with Bird.

[Guest Sieve]

You're right about individualizing the approach. Many of my clients have a match that is payroll based & contributed on a per-payroll basis, with no PS contribution, so immediate distribution works (or, theoretically, should work).

Nevertheless, many TPAs continue to use the ASAAF language for all their plans, and then take the approach that the ASAAF language permits either an immediate distribution or a distribution after year-end, depending on plan administrative considerations--and I think that's why some beleive that it's a more flexible approach than choosing the after-year-end language.

[BG5150]

Does "after the close of the plan year" mean after Dec 31 (for calendar year plans, obviously)? Or does it mean "after all contributions for the plan year have been made"? There is a significant difference.

Using the latter may mean that distributions might not be done until the following September or October. So if a participant terminates in January, then he or she may have to wait 21 or 22 months to rollover an account that may or may not be getting an insignificant contribution (comparable tot he rest of the account blance).

[Guest beppie_stark]

Our large DC plan only permits distributions "nine months after the end of the quarter in which termination of employment occurs" to allow for the deposit of the lagging company contributions. Our counsel long ago impressed upon us that it is important to be consistent with all similarly situated employees so everyone waits at least nine months, whether they have accrued contributions or not.

[TPAnnie]

... if a plan administrator had the "pay as soon as administratively feasible after the close of the plan year" provision in the plan but went ahead and paid the participant shortly after termination?

I think I heard or read somewhere that plan qualification depends on administering the plan in accordance with the provisions of the plan document. I'm with Bird.

Is this a disqualifying event? Our plan inadvertently allowed an immediate payout though the doc says after plan year end. We've been tagged for audit and are trying to determine if it's a disqualifying event or if there is a self-correction method.

TIA!

Annie :-)