Terminee Distributions from Annual Valuated Plans

[Gadgetfreak]

The Plan Document specifies "as soon as administratively feasible". It is not uncommon for the annual valuation and participant statements to be prepared well into the 2nd quarter of the following year.

I am just curious in hearing what other people do with the timing of these distributions. Do you base it only on when you get the form or also on the date of termination? And do you have set deadlines to say that if you receive the form by _____, you will process based on the most recent valuation but after _____ they need to wait until the next val is done?

Thanks.

[Lou S.]

What does the Plan document say. We have very few annually valued plans left but unless the document says different we pay the value on the last valuation for the entire year. So for calendar year plans up until 12/31/xx+1 we pay out 12/31/xx value.

[Gadgetfreak]

The Plan Document specifies "as soon as administratively feasible". So if someone sends in their form on 3/15/15 (and he terminated on 2/20/15), would you give them their account value based on their 12/31/14 statement (which you may not get done until July 2015)? What about the fact that he was part of the Plan for the first two months of 2015. Though that would mean that he would need to wait until July 2016 for his money. See the problem ?

[GMK]

^ and you may want to have the Plan Document specifically say what Lou S said. Or it could say 'based on the most recent valuation.'

The plan administrator has to take into consideration that distributions have to be fair not only to the participant receiving the distribution, but also to all the other participants. For example, if the value jumps up or down significantly (or if it's pretty obvious that it will), it may be prudent to do another valuation (I know, yuch) to get a fair price for distributions late in the year. And whatever is done, it should be done consistently in future years.

As to timing in your example, for our annually-valued plan, if someone terminates in 2015, they will be paid out (if they request it) the following spring (we try to be before July), in 2016. Depending on how many hours they put in in 2015, they may participant in allocations for 2015, but that's a separate matter. The exception in our plan is that if a participant is not employed and reaches age 65, they are cashed out, as soon as practicable after the first of the month following their retirement or following the month in which they reach age 65, if later. The distribution is based on the valuation as of the end of the previous year.

[Bird]

First you have to be very sure about when they are entitled to a distribution - almost any new plan we write will say after the end of the year. If, in the scenario you describe, the person term'd on 2/20/15 and is entitled to an immediate distribution, they would get it based on 12/31/14, the latest val date. (Setting aside issues about contributions during the year, which is why we don't like immediate distributions, especially for pooled plans.)

Now, if the participant has a "large" proportion of the plan assets, it might be prudent to declare a special valuation date, in fairness to both the terminating participant and the other participants. And/or, make sure sufficient cash has been set aside to pay him/her, so you don't have to fuss about the earnings or losses on that portion.

(Way back when I first started, my boss kind of arbitrarily decided that we would add 6% annualized interest to any such distribution. It seemed fair, but I eventually came to realize that while it might be fair, it wasn't right. Once I started looking to the documents for answers pension life got a lot simpler.)

[Mike Preston]

Does anybody else's head hurt when they see the word "Valuated"?

[Bird]

I didn't notice it at first but...ouch.

[Gadgetfreak]

My issue with using the latest valuation date is that it sometimes doesn't get done until June. If someone sends in a distribution request in April 2015, they were part of the Plan for 2014 and 4 months in 2015 but the latest val is 12/31/13. In addition, if someone sends in a distribution form in August 2015, they will get the balance based on 12/31/14 but they were in the Plan for 8 months of 2015.

I also am not sure that a termination date has any bearing on this at all. The only reason I can see is whether they may be entitled to a year-end contribution (based on Plan design). But, as it relates to earnings, they are a Plan participant for as long as they have a balance and should share in earnings (or losses) just like anyone else.

So I am just trying to gather ideas of how others implement the policies for these types of distributions.

Thx,

[ESOP Guy]

The Plan Document specifies "as soon as administratively feasible". So if someone sends in their form on 3/15/15 (and he terminated on 2/20/15), would you give them their account value based on their 12/31/14 statement (which you may not get done until July 2015)? What about the fact that he was part of the Plan for the first two months of 2015. Though that would mean that he would need to wait until July 2016 for his money. See the problem ?

All I ever used to do was annual valued plans. If the plan really says what you say-- as soon as administratively feasible and it say to use the value as of the last valuation date-- and the person terminated on 2/20/2015 you would pay them based on 12/31/2014 balance. (Assume a 12/31 PYE). That fact they were in the plan for a few months in 2015 is not relevant. If it takes until July of 2015 to get the work done then that is as soon as administratively feasible to pay the person. (The delay needs to be reasonable you can just wait until the following Nov to start the work and say it wasn't feasible until then.)

You operate the plan according to the plan's terms. You can't ignore the plan document. If people don't like how the document says to operate the plan theen change the plan to quarterly or daily valuation.

I will say as others have pointed out the plan Administrator needs to think about how this provision can be abused. For example: Back in 2008 I used to work on a quarterly valued profit sharing plan that allowed just about anyone to take an in-service. It was a hospital. It dawned on one of the doctors that he could get an in-service distribution based on the prior quarter's balance and avoid all the 2008 losses post Sept. He took his money and started telling his buddies about what he did. This set off a run on the bank as people wanted to get their money out before the next valuation date.

The hospital quickly changed the plan to required you to wait until after the quarterly valuation after your request to get paid.

Also, using the hospital example above most plans allow the administrator to have the plan do a valuation on an ad hoc basis if prudent. In extreme years it might be prudent to have a few ad hoc valuations happen to reflect such large market moves.

[GMK]

The delay needs to be reasonable you can just wait until the following Nov to start the work and say it wasn't feasible until then.)

typo, yes? You can't just wait until November and claim unfeasibility.

[Bird]

If someone sends in a distribution request in April 2015, they were part of the Plan for 2014 and 4 months in 2015 but the latest val is 12/31/13.

The latest val date before the distribution is processed is 12/31/14. Maybe it's not done yet but there's no doubt that what should be used, when it is known. Forget about the 4 months in 2015 (or as discussed above, change the plan if you don't like it).

[Gadgetfreak]

So it seems that your interpretation (and this is what we do as well) is that any distribution requests that come in between 1/1/15 and 12/31/15 should be processed using 12/31/14 y/e. Which means we are holding the requests that come in during the first half of 2015 until the 2014 val is done and processing everything else based on the prior year.

I am just hung up on the person that was a participant for anywhere from 1-11 months in 2015 and won't be sharing in the earnings (or losses). I suppose an extra val could be done but that is more work and the client may not want to pay for it.

[ESOP Guy]

The delay needs to be reasonable you can just wait until the following Nov to start the work and say it wasn't feasible until then.)

typo, yes? You can't just wait until November and claim unfeasibility.

Correct typo should be can not.

[ESOP Guy]

So it seems that your interpretation (and this is what we do as well) is that any distribution requests that come in between 1/1/15 and 12/31/15 should be processed using 12/31/14 y/e. Which means we are holding the requests that come in during the first half of 2015 until the 2014 val is done and processing everything else based on the prior year.

I am just hung up on the person that was a participant for anywhere from 1-11 months in 2015 and won't be sharing in the earnings (or losses). I suppose an extra val could be done but that is more work and the client may not want to pay for it.

It works both ways. In 2008 they didn't share in the losses in 2014 they don't share in the gains. it was assumed it all washed out in the end back when these kinds of plans were common. I would add back then daily plans were not cost effective for small plans so there wasn't much choice.

If this really causes an issue the solution is daily valued. What you are describing is a big reason why there was a push to daily value. People didn't like the fact people could end up not getting gains or losses on the months it took to finish the annual work.

But running an annual plan the way we are describing is legal and like I said back in the day common.