process distributions during VCP?

[mariemonroe]

I have a client who needs to correct some plan errors pursuant to VCP. One of the errors may require the employer to make an additional contribution to the plan.

An employee has just terminated employment and is entitled to a distribution.

Can (or should) the employer pay the employee out or retain the employee's account balance pending resolution of the VCP matter (bear in mind the application has not yet been submitted).

Any thoughts are welcome.

[My 2 cents]

Would failure to pay the account out (if called for by the plan) create another error subject to VCP?

If the VCP (when approved) requires that the employer pay more in, would there be a problem with paying out the new piece after the existing account is paid?

[mariemonroe]

The plan says to pay out after separation from service "as soon as administratively feasible."

I don't think a pending VCP filing that may ultimately affect the account balance is a justification for not proceeding with the distribution.

I am just curious what others think and whether anyone knows of guidance on this point. It seems to me this would be a common occurrence (i.e. distribution events during VCP) and that employers probably don't discontinue all distributions during a VCP that may last for several months.

[MoJo]

I guess there can be differences of opinions as to what "administratively feasible" means. I think if the VCP filing could result in a DECREASE of the participant's account balance, there may an issue of "protecting plan assets" and the known difficulty of trying to get overpayments returned. But if the VCP filing could only INCREASE the participant's balance, then what is the impediment to a secondary distribution? An initial distribution of a known balance is easy. A secondary distribution of a corrective contributions is likewise "easy." Last I checked, the "cost" of doing a secondary distribution is irrelevant in the decision. If it was the plan sponsor's error, it is the plan sponsor's burden to make it right.

The "best" approach (IMHO) is to follow normal plan procedures and precedence in processing the distribution, and if necessary, make a secondary distribution AFTER the VCP correction has been made - especially if that determination may be months, if not many months into the future.