Proper Employee Distribution

[efinances]

I have a question regarding the retirement account for my company which is a Profit-Sharing Plan, 100% employer contribution. I have a former employee who is 100% vested in the plan though has not worked for me for several years. He had elected to keep his money in my profit-sharing plan, without additional employer contribution. At this time, this former employee is electing to have his distribution rolled over to an IRA account. By definition in the SPD, the plan year is 1/1 to 12/31. The valuation date is the last day of the plan year (12/31). The valuation is calculated annually, and this is usually done around October of the following year. Right now, we have the numbers for the valuation up to 12/31/2018. I know that the profit-sharing plan gained money in 2019, but do not have those exact numbers calculated yet. The employee is asking for a partial distribution based on the 12/31/18 valuation and then a total distribution for the 2019 gains once that number is calculated (around October 2020).

What are the rules pertaining to this type of distribution? I do not want this former employee to miss out on the profits earned in 2019. Is it possible to do a partial rollover for the 12/31/18 amount and then give him the final 2019 profits once this is calculated? Thanks.

[jpdrews]

Check the plan document to see what it states regarding the timing of distributions.  The plan doc should also cover your question on whether a partial distribution is allowed.  

[efinances]

31 minutes ago, jpdrews said:

Check the plan document to see what it states regarding the timing of distributions.  The plan doc should also cover your question on whether a partial distribution is allowed.  

Regarding timing of distribution, the plan states "Payment of your benefits will begin as soon as practicable following your termination of employment, based on your
account value on the preceding valuation date."

The "preceding valuation date" is technically 12/31/19 but my accountant wont have those 2019 numbers till later on in 2020 (October). The former employee is requesting the 2018 valuation now and then the 2019 gains when the numbers are figured out. Would this be allowed?  

The plan does not state any restriction with regards to partial distributions.

[JackS]

On 1/7/2020 at 4:56 PM, efinances said:

Regarding timing of distribution, the plan states "Payment of your benefits will begin as soon as practicable following your termination of employment, based on your
account value on the preceding valuation date."

The "preceding valuation date" is technically 12/31/19 but my accountant wont have those 2019 numbers till later on in 2020 (October). The former employee is requesting the 2018 valuation now and then the 2019 gains when the numbers are figured out. Would this be allowed?  

The plan does not state any restriction with regards to partial distributions.

Use your best judgement.  Pay him out 100% of 12/312018 and then pay out the rest once the valuation is done....pay him out 80% of 12/31/2018 and the rest when the val is done (in the event that the plan may have sufferred a loss this would protect the plan from an overpayment).  Had you paid him out before 12/31/2019 100% of the 12/31/2018 valuation, you would not owe him any gains/losses for 2019 but since the payment is obviously occuring in 2020, you would need to allocate g/l to his account for 2019.

[Bird]

11 hours ago, JackS said:

Pay him out 100% of 12/312018 and then pay out the rest once the valuation is done....[or] pay him out 80% of 12/31/2018 and the rest when the val is done (in the event that the plan may have sufferred a loss this would protect the plan from an overpayment).  Had you paid him out before 12/31/2019 100% of the 12/31/2018 valuation, you would not owe him any gains/losses for 2019 but since the payment is obviously occuring in 2020, you would need to allocate g/l to his account for 2019.

I agree with this, but I think an "or" is missing (I added in brackets).  If you're sure you had gains for 2019, and in all likelihood you did, then pay the 100%.

As a side note, it really shouldn't take until October to determine this person's account balance.  He's not getting a contribution, and that is probably why your val isn't completed until October - so that contributions are allocated are included in the val.  But the gains or losses should be able to be determined and allocated much sooner than that.  But if your plan is being run by your accountant, then it is on hold until s/he's done with tax season...and...you didn't ask for this with your fairly innocent question, but if your plan is being run by your accountant, there are probably lots of things wrong with the way it is being run.  That is based on experience taking over plans that were run by accountants.

[fmsinc]

The question is out of my area of expertise, but how can it take until October, 2020, to determine a value as of December 31, 2019.  Am I missing something?  What sort of assets are held by the Plan that take 9 months or more to value?  That would result in the Participant losing whatever gains are made from December 31, 2019, through October, 2020, or conversely, the Plan having to pay out more than it should if there is a loss in value from December 31, 2019, through October, 2020, and more than it HAS as of the October 2020 valuation date.   

This issue was addressed in 2018 at  

  

[Bird]

16 hours ago, fmsinc said:

The question is out of my area of expertise, but how can it take until October, 2020, to determine a value as of December 31, 2019.  Am I missing something?  What sort of assets are held by the Plan that take 9 months or more to value?

I explained that in my post, or at least made assumptions - the val is being done by an accountant, so it starts out on the (way) back burner.  Then the sponsor and accountant are probably making decisions on contributions as late as possible (October) and not finalizing the val until then.  So they think this particular participant's account is unknown until then when in reality it can be determined much earlier by allocating gains or losses when determined; additional allocations of contributions are not relevant to this participant's account.

16 hours ago, fmsinc said:

That would result in the Participant losing whatever gains are made from December 31, 2019, through October, 2020, or conversely, the Plan having to pay out more than it should if there is a loss in value from December 31, 2019, through October, 2020, and more than it HAS as of the October 2020 valuation date. 

As suggested by JackS, they could pay the 2018 balance now and gains later and avoid some of that.  If it's a large account relative to the rest of the plan, I would always recommend setting aside an estimated amount of cash so that market fluctuations (specifically a downturn) does not affect other participants.  If the market goes up, the participant is SOL...a case might be made for some kind of fiduciary liability but it wouldn't be worth the effort/cost to pursue it.  Bottom line, you are right that it shouldn't take so long and a lot of headache and hassles can be avoided by better administration.

[ESOP Guy]

The real problem of not paying the balance until Oct 2020 is to the rest of the people.  Bird gets at that but I want to emphasis it.  If this person has a large balance relative to the whole plan this becomes an issue. 

I was doing balance forward PS plans back in 2008.   Imagine if you had to pay someone with a large balance on their 12/31/2017 balance as of October 2008?  The plan has been suffering large losses all year but this person doesn't share in them.  So the losses on those fund get passed on to the other people in the plan who stay behind.   In fact we had a hospital client that allowed some in-service payments based on the prior 12/31 balance.  They had to modify the plan in 2008 because word was getting out with the doctors they could avoid the 2008 loss by taking an in-service distribution.  There was going to be a "run on the bank".  

Sure the reverse happens in a 2019 which surges from 2018 to October 2019 which is unfair to the person who is being paid.  

I would talk to your accountant about revising the plan's procedures.  As Bird says there is no reason the earnings can't be known in the first quarter of a year in this type of plan.   All the bank and brokerage statements would have been in by end of January.  

The other solution is the partial payment idea.  I would just run this by a lawyer to make sure the plan document supports such a procedure.  

I think this puts the plan and its participants in a better plan. 

[fmsinc]

You did not reply to my inquiry about the type of assets in the Plan.   On January 3, 2020, I receive statements for the 12-31-19 value of my retirement and investment accounts.  What in the world takes 9+ months to value?