Handling residual earnings

[PLAN MAN]

A resolution by the retirement plan committee (not a plan amendment):

"Until a Participant or beneficiary receives an additional contribution to his or her account under the Plan, no income or gains of less than $25 shall be allocated to a Participant's or beneficiary's account after he or she has received a lump-sum distribution from the Plan. If such income or gains are allocated to a Participants's or beneficiary's account, such amounts, as directed by the Committee, shall be treated as forfeitures of Matching Contributions."

[Mike Preston]

Might want to clean up that language a bit. Sounds like you have just established a minimum required gain/loss allocation for prior participants of $25 per valuation. I know that isn't your intent.

With that said, I'm not comfortable with the intent of the language, so I don't have any suggestions on how it should be worded.

[Jim Norman]

Hi Mike,

What's wrong with the intent? Seems like a good idea to try to document procedures for a situation that comes up all the time and is often handled this way on an informal (and not always consistent) basis. Sometimes tiny remainders are just charged as a fee for the "distribution" when all it does is zero out the account. Seems like avoiding the "distribution" in the first place and retaining the money in the plan is a reasonable objective.

Jim

[GMK]

"Until a Participant or beneficiary receives an additional contribution to his or her account under the Plan, ..."

If I were processing this account, I would like some written direction on how long I should wait for this possible additional contribution to be made. And if I know one is coming at some time in the future, should I allocate the under $25 income or gain now or wait or skip it?

Also, just me, but I would prefer a plan amendment that authorizes the committee to withhold from a participant or former participant an amount (up to some maximum amount) that would otherwise be the participant's. The committee can decide how to administer it, but I like the authorization to keep the money in the plan to be in the plan doc, i.e., formally approved by the plan administrator.

[david rigby]

Is "lump sum distribution" defined in the Plan?

If not, the meaning of the original quote will be vague.

[Mike Preston]

Jim, I don't know. Just a feeling of being uncomfortable. Just like I'm uncomfortable with plans that charge a specific amount to process a distribution. I know it is done in some quarters. But none of my plans do so and I'm not sure I wouldn't resign if a plan of mine wanted to.

Wasn't there some recent guidance from the DOL or IRS on this issue? I have a vague recollection that they said it was perfectly reasonable to allocate only to those who would have a net balance, after allocation of the income and negative allocation of the expense associated with the allocation. Was that in the latest EPCRS Rev. Proc? Did it also talk about the negative allocation of the expense associated with the distribution?

In any event, if I really, really had to go down this path I think I would incorporate those factors into the amendment.

Admittedly, I have precious few participant distributions that are so small that they would be obliterated with a charge of up to $100, so maybe I'm spoiled.

[Jim Norman]

Admittedly, I have precious few participant distributions that are so small that they would be obliterated with a charge of up to $100, so maybe I'm spoiled.

It's never a factor in DB plans, but OMG some of the things that come up in 401(k). And seems like most employers we work with want the participant account charged for the distribution fee. Yeah, you're definitely spoiled! Enjoy it!