Vested Acct Bal after partial withdrawal?

[BG5150]

Either my math or my senses is failing me (maybe both!) here.  Participant is partially vested in a source.  She takes a partial distribution.  The BPD gives this formula to determine what her vested account balance will be after the distribution.

Quote

X = P(AB + (R x D)) - (R x D)

For purposes of applying the formula: P is the nonforfeitable percentage at the relevant time; AB is the Account balance at the relevant time; D is the amount of the distribution; and R is the ratio of the Account balance at the relevant time to the Account balance after distribution ( AB(1)/AB(2) ).

So I have:

P = 50%

AB(1) = 10,000

D = 1,000

AB(2) = 9,000

R = 1.111 (10/9)

So, the math according to the formula is:  .5 (10,000 + (1.111 * 1000)) - (1.111*1000) = 4,444.44

Shouldn't the vested balance be merely $4,000?  She had $5,000 vested, took 1,000 of it and so should only have 4,000 vested.

Where did I go wrong?

[Kevin C]

That's not the formula our document uses, but the way I see it described in our reference source, the "relevant time" is meant to be the current time.  So, if you are calculating her remaining vested balance immediately after the distribution, AB(1) = 9,000 and R= 1.0 (9,000 / 9,000).  That will give you a result of 4,000 vested like you expect. 

 

[BG5150]

What reference source is that, KC?

[Kevin C]

message sent.

[Luke Bailey]

BG5150, why isn't it clear? She had $10,000 and took $1,000. The plan made 11.1% between that time and the new distribution date, so at the later date, if she had not taken the distribution, her account would be $11,111, and 50% of that would be $5,555. Meanwhile, her $1,000 has grown outside plan to $1,111. If she takes another distribution now, and assuming the 50% has note gone up), she gets $4,444.

[BG5150]

I guess I don't have the relevant account balance correct.  I thought the formula would calculate the vested balance using the total balances right before and right after the distribution.

[Luke Bailey]

8 minutes ago, BG5150 said:

I guess I don't have the relevant account balance correct.  I thought the formula would calculate the vested balance using the total balances right before and right after the distribution.

Right, BG150. No, the whole point is that you distribute someone's vested balance, typically at termination, and you figure that's the last you'll see of them. If that is the last you see of them, then you're done until the time under your plan doc for forfeiture of the unvested portion of the account, and then you are really done. The point of the formula is for someone who comes back within the 5-year period during which they have the ability to essentially "reclaim" the nonvested portion and continue on with their vesting. If they leave again before being fully vested, it would be unfair to just distribute the new vested portion of the account without taking into account that they already did that once. E.g., if someone takes 40%, then 40% of 60%, then 40% of 36%, etc., pretty soon they have a 100%, even though only 40% vested.

[BG5150]

The point of the formula is to calculate the vested balance in an account where there was a partial distribution.  If that happens, it's not as easy as just applying the vested % to the account.

As in my example, Ppt has balance of 10,000 and is 50% vested.  So 50% of 10k is 5k.

But if he takes 1,000 he's left with 4,000 vested and still 5,000 unvested.  The vested/unvested % is now 44.4%, not the 50% level.