Employer discretion over form of benefit

[JRN]

I've been struggling with the following issue for some time now; what do others think about this?

Can an Employer reserve in the ESOP plan document discretion to change, from year-to-year, the form of benefit from lump sum to installment? For example, could the Plan document be drafted to provide that benefits will be distributed in either a lump sum or in installment payments over a period not to exceed 5 years, and further provide that the Employer reserves the discretion to decide both (1) lump sum or installment, and (2) if installment, over how many years.

I don't think so.

I know it's okay for the Plan document to reserve to the Employer the discretion to eliminate the lump sum option (i.e., formally amend the Plan document to eliminate the lump sum option), but I understand from a few TPAs that ESOP plan documents are being drafted by some attorneys to reserve to the Employer discretion to decide lump sum or installment.

Is this right? Thanks for your help.

[QDROphile]

Installment period cannot exceed 5 years. What you describe is defensible, if not generally accepted. A devil is in the operation (other demons are in ESOPs in general , but they were installed by the creator). The changes, which are amendments, cannot be discriminatory.

[ESOP Guy]

While maybe in theory you can defend the idea the employer gets to choose every year as a practical matter I don't think you should do it.

I have heard short discussions about how much flexability the rather loose ESOP rules give you regarding changes to distribution methods at various ESOP related conferences. The general consensus seems to be while you can change -- changing too often opens you up to too much risk of charges of discrimination and so forth.

I would add in the now over 20 years I don't think I have ever seen the need to choose and change year to year. I guess you might have finally found that fact pattern but a well crafted distribution policy combined with a good repurchase study ought to allow you to find a method that should work for the plan sponsor.

If you have want to give more details maybe you can get insights from this board on ways to meet the sponsor's goals.

Lastly, you can go over 5 years on the installments if the balances are large enough. A rarely used part of the law but it is there.

[JRN]

Thanks QDROphile and ESOP Guy. My focus in asking the question was to get thoughts on how much "employer discretion" could be baked into the plan document without running afoul of the anti-cutback rule. I very much appreciate your insight.

[Marcus R Piquet]

I've heard of plenty of pushback from Cincinnati when this is left as purely discretionary due to the "definite written plan" principle. While the anti-cutback exception clearly allows for changes here, in my opinion it should be done through plan amendment or revision to the distribution policy (which should be explicitly incorporated by reference in the plan doc).