Trustee Refusing To Approve Distribution

[Stash026]

I'm running up against an issue that I've never had before.  The financial institution requires the Plan Trustee to sign off on any distribution.  We have a terminated participant who has requested a distribution of his account (which includes 401(k) deferrals) and it appears that the Trustee is refusing to authorize it.  I'm not sure if there's a reason behind it, bit what are the ramifications if the Trustee refuses to ultimately approve it?

Thanks in advance!

[ESOP Guy]

You need to find out if the reason is a legit reason or not. 

But if the person needs to be paid per the plan document and the trustee simply refuses that is a plan disqualifying defect.  They have failed to operate the plan according to the terms of the document. 

There might be other ramifications but that one ought to be enough of a reason to make the payment unless there is a valid reason to not do so. 

[david rigby]

1 hour ago, ESOP Guy said:

You need to find out if the reason is a legit reason or not. 

It's possible that what you need to do depends on your relationship to the plan and/or plan sponsor and/or plan administrator.

[Lou S.]

The Plan should have review procedures. Despite how much the Trustee may personally dislike the ex-employee unless  there is a valid legal reason for denying the claim, you might want to let the Plan Trustee know that he might be in breech of fiduciary duty.

Not saying this is the case here but often when this happens there is a dispute about money the ex-employee may owe the company (or owner) and sometimes criminal embezelment (sp?) charges may be pending. Usually the anti-alienation provisions of  ERISA with respect to the Plan don't care about those other issues but sometimes they do. If it gets to that point though it's usually best to get a qualified ERISA attorney involved in the process.

 

[Kevin C]

If this drags on very long, the participant is likely to contact the DOL.  If/when that happens, they will get a phone call from a DOL Investigator asking why the participant hasn't been paid.  Where it goes from there depends on the facts and the Trustee's actions.  If the Trustee continues to refuse to pay someone who is eligible for a distribution, I would expect it to result in a DOL investigation.

[Stash026]

I was able to get a little bit more information.  There's basically a dispute that the company feels he owes them money from a project and he is in dispute/refusing to pay.  How does that impact the Trustees decision?

[BG5150]

It cannot affect the Trustee's decision at all.

[Larry Starr]

38 minutes ago, Stash026 said:

I was able to get a little bit more information.  There's basically a dispute that the company feels he owes them money from a project and he is in dispute/refusing to pay.  How does that impact the Trustees decision?

Ah ha!  That is the customary reason for these issues. The trustee has to be informed that he has no right to withhold the payout because of an external issue between the employee and the employer. The trustee is a fiduciary to the plan; he cannot act as an agent of the employer even if he IS the employer.  The trustee needs to proceed with regard to this participant as if the dispute was non-existent, and failure to do so can make him PERSONALLY responsible for the violation and lots of other legal problems.  I tell my clients (in situations like this) to just hold their noses and do what they are required to do - pay the individual.

[ESOP Guy]

Like I said find out if the Trustee's reason is legit or not.  As others have pointed out the trustee's reason are not legit.  The plan has to pay.  

[Lou S.]

57 minutes ago, Stash026 said:

I was able to get a little bit more information.  There's basically a dispute that the company feels he owes them money from a project and he is in dispute/refusing to pay.  How does that impact the Trustees decision?

See code section 401(a)(13) and regulations thereunder.

BG5150 and Larry Starr are correct.

 

[Earl]

When you find yourself digging yourself into a hole, stop digging.

Pay the man.

[Luke Bailey]

Agree with all of the above, but think that the business owner wearing his/her plan sponsor hat is not prohibited from using his/her knowledge of the distribution and its timing to assist in collection efforts. However, if the employee is smart, he/she will do direct rollover to IRA, which will take the money out of the realm of collection.

[jeff77]

Does anyone have any thoughts here if there is a failure to provide a blackout notice?

[Larry Starr]

3 hours ago, jeff77 said:

Does anyone have any thoughts here if there is a failure to provide a blackout notice?

Are you asking if this situation gives rise to a failure to provide a blackout notice?  If that's the question, I think not. Nothing has been said about the ability of the participant to invest his funds in accordance with the plan investment options.  Just that he hasn't been able to get his money OUT.  That does not give rise to a blackout issue, but it does give rise to a violation of ERISA rights and can leave the trustee personally responsible.  "Pay the $2 dollars".