Partial lump sum distributions

[Guest Serena]

I want to know if partial distributions are protected benefits? It appears Examples 4 and 5 could be interpreted as being the case.

Any thoughts??

§ 1.411(d)-4 Section 411(d)(6) protected benefits.

Q–1: What are “section 411(d)(6) protected benefits”?

A–1: (a) In general. The term “section 411(d)(6) protected benefit” includes any benefit that is described in one or more of the following categories—

(1) Benefits described in section 411(d)(6)(A),

(2) Early retirement benefits (as defined in §1.411(d)–3(g)(6)(i)) and retirement-type subsidies (as defined in §1.411(d)–3(g)(6)(iv)), and

(3) Optional forms of benefit described in section 411(d)(6)(B)(ii).

Such benefits, to the extent they have accrued, are subject to the protection of section 411(d)(6) and, where applicable, the definitely determinable requirement of section 401(a) (including section 401(a)(25)) and cannot, therefore, be reduced, eliminated, or made subject to employer discretion except to the extent permitted by regulations.

(b) Optional forms of benefit—(1) In general. The term optional form of benefit has the same meaning as in §1.411(d)–3(g)(6)(ii). Under this definition, different optional forms of benefit exist if a distribution alternative is not payable on substantially the same terms as another distribution alternative. Thus, for example, different optional forms of benefit may result from differences in terms relating to the payment schedule, timing, commencement, medium of distribution (e.g., in cash or in kind), election rights, differences in eligibility requirements, or the portion of the benefit to which the distribution alternative applies.

(2) Examples. The following examples illustrate the meaning of the term “optional form of benefit.” Other issues, such as the requirement that the optional forms satisfy section 401(a)(4), are not addressed in these examples and no inferences are intended with respect to such requirements. Assume that the distribution forms, including those not described in these examples, provided under the plan in each of the following examples are identical in all respects not described.

Example 1. A plan permits each participant to receive his benefit under the plan as a single sum distribution; a level monthly distribution schedule over 15 years; a single life annuity; a joint and 50 percent survivor annuity; a joint and 75 percent survivor annuity; a joint and 50 percent survivor annuity with a benefit increase for the participant if the beneficiary dies before a specified date; and joint and 50 percent survivor annuity with a 10 year certain feature. Each of these benefit distribution options is an optional form of benefit (without regard to whether the values of these options are actuarially equivalent).

Example 2. A plan permits each participant who is employed by division A to receive his benefit in a single sum distribution payable upon termination from employment and each participant who is employed by division B in a single sum distribution payable upon termination from employment on or after the attainment of age 50. This plan provides two single sum optional forms of benefit.

Example 3. A plan permits each participant to receive his benefit in a single life annuity that commences in the month after the participant's termination from employment or in a single life annuity that commences upon the completion of five consecutive one year breaks in service. These are two optional forms of benefit.

Example 4. A profit-sharing plan permits each participant who is employed by division A to receive an in-service distribution upon the satisfaction of objective criteria set forth in the plan designed to determine whether the participant has a heavy and immediate financial need, and each participant who is employed by division B to receive an in-service distribution upon the satisfaction of objective criteria set forth in the plan designed to determine whether the participant has a heavy and immediate financial need attributable to extraordinary medical expenses. These in-service distribution options are two optional forms of benefits.

Example 5. A profit-sharing plan permits each participant who is employed by division A to receive an in-service distribution up to $5,000 and each participant who is employed by division B to receive an in-service distribution of up to his total benefit. These in-service distribution options differ as to the portion of the accrued benefit that may be distributed in a particular form and are, therefore, two optional forms of benefit.

[Guest Sieve]

What do you mean by partial distributions?

The examples you note are determining the meaning of "optional form of benefit", not necessarily whether those benefits are protected. For example, Example 4 considers a hardship distribution as an optional form of benefit, yet it is not a protected benefit.

[david rigby]

The original post may have an unspecified focus:

Suppose the plan has been administered to pay partial distributions (that is, as a convenience for the participant). Even tho not specifically described in the plan document, is this administrative process protected?

Is that your question?

[Guest Serena]

Sorry David, it was late, and electronic research is sometimes hard to read and copy and paste!

Yes you pretty much summarized it correctly. Plan has been administered by allowing partial lump sum distributions to terminated employees. Plan document only allows lump sum. so they have an operational failure. You can retroactively amend to add them in - and file under VCP - but what if sponsor does not want to offer them, never did, it was done by mistake thru a field HR office in conjunction with a vendor who just processed them without looking at plan document either. So now since they were allowed, and they are a protected benefit, how do you eliminate? Just do not add them back in and stop allowing them - yes you have a period of noncompliance and are at risk if audited - or add them retroactively in the document for that period, and eliminate prospectively for your new hires lets so. So the option will still have to continue for those who are grandfathered.

Can you think of any other alternative? This must happen for other clients?