Participant Directed Investment Elections For Terminated Participants.

[Guest Frank Jackson]

This issue comes up from time to time. I have a client that wants to allow participant directed investment elections for active employees but not for terminated employees. The entire population (Terms and Actives)is currently employer directed only. Does this cause a 401(a)(4) discrimination issue? Please let me know if you know of an article or regulation that has addressed this issue.

[Kirk Maldonado]

I think you have a Section 411(a)(11) issue.

[pjkoehler]

A qualified plan must obtain the written consent of a participant if the present value of the vested total accrued benefit exceeds $5,000 at the time of the distribution. Code Sec. 411(a)(11). A participant's consent is not valid if a "significant deteriment" is imposed on a participant who does not consent to a distribution, i.e. the notion of providing a design-based disincentive to deferring distribution is likely to jeopardize the plan's qualified status. In Rev. Rul. 96-47 the Service specifically held that the loss of the right to choose among a broad range of investments that is otherwise available to participants who are active employees constitutes "significant detriment" vitiating the participant's "consent" to the distribution.