Balance Forward Safe Harbor 401(k) Distribution

[Guest mcw]

We have a client with a safe harbor 401(k) plan (3% nonelective) with annual valuations and distributions as soon as feasible after termination of employment. If a participant terminates mid year and want his money what do we give him? I assumed it would be previous year's account balance plus elective deferrals. However, I have looked at the plan document and can't find where it tells me. It is a Corbel VS plan. Also, the particpant will get the 3% safe harbor at the end of the year. Do we make another distribution after the contribution has been made?

[K2retire]

In a balance forward plan, the only thing you have to go on is the most recent statement (be they annual, quarterly, whatever). Participants don't like it, but that's they way they work. If you make a distribution now, you will have to make another one after the final employer contribution is deposited. That is why many balance forward plans call for distribution after the end of the plan year of termination rather than immediately.

[D Lewis]

Of course it's better to have distributions after the end of the year for this situation as K2retire said, but if the document does have immediate cash outs for a balance forward plan, I don't see why the amount of the distribution can't be the vested amount of the latest valuation, plus any current period deferrals and Safe Harbor contributions. No current period gains or losses.

It requires a little extra work to find out from the employer the compensation to calculate the Safe Harbor, and to find out the deferral amount, but it's not that hard. And with a balance forward plan, it doesn't even matter if the employer has deposited the Safe Harbor yet.

Of course one has to look to the document, but I think most are silent on this issue.

I would be interested to hear if others think this is not allowed, as depending on the situation, we have done this.

Of course profit sharing is a different story, and depends on the plan design. Most of ours have 1,000 hours - last day for PS, so unless there is a testing problem, the terminated participant is not getting that piece. If they do get a PS, then that part would require a 2nd distribution (unless it is a fixed required pro rata ps).