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Inservice distribution from 401(k) Pooled Account - need written policy or procedures example


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FtWilliam plan document - adoption agreement allows inservice distributions for participants age 59-1/2 and fully vested.  Employee with 20+ years service wants to go part-time and take inservice.  Plan assets are held in pooled account.  Looking for example of procedure that spells out limitations and ordering rules.  Any advice appreciated!

Thanks!

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If any asset does not have daily valuation and daily liquidity, you probably need a policy that limits the “immediate” distribution to a percentage of the requested amount (e.g. 80 percent, depending on experience and fears regarding market volatility — downward) and a post-valuation true-up. Or you can have special valuations with respect to each special distribution.  Management of assets, such as ordering of liquidation you mentioned, is another matter and is dependent on assets and current management. For example, how big is the pool and the cash-equivalent holdings? How many participants are there and what are the general liquidity projections? Beware the fit of any template you may come across — this is not necessarily just a matter of mechanics. Maybe if all assets have daily liquidity and daily valuation.

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If it is allowed by the plan, then it is allowed. If asset values have decreased since the latest val (generally end of prior year) then you can do a special val (or if assets have increased and the trustees find it prudent for the participant to share in the gains). Otherwise you just pay the person out and they get no gains or losses for the year. If you haven't done the 12/31 val yet then I would wait until that is done. People need to understand that it's not a bank where you walk in and get your money right away (or not, as in the case of SVB, but I digress).

Ed Snyder

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As noted by QDROphile and Bird, the valuation date is frequently an issue. Easiest to administer is last valuation date but market fluctuations can cause this to be unpopular.  If the last val is higher, then the plan will be paying out assets that can be perceived as "belonging" to the remaining Participants.  If the last val is lower, the Participant receiving the payout will want more than the rule entitles him/ her to.  A special val can be perceived as solving this but this is an expense the sponsor may not wish to incur.

As you are already experiencing, this plan has drafting issues.  The drafter should have removed the language permitting  in-service withdrawals and the language concerning termination withdrawals should be carefully considered.

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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6 hours ago, Patricia Neal Jensen said:

The drafter should have removed the language permitting  in-service withdrawals

Why is that, and is(n't) it a cutback anyway? How is an in-service distribution different from a termination distribution, in terms of the valuation issue?

Ed Snyder

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We can talk about what the plan woulda, coulda, shoulda have said, but in the end the plan has to follow the terms of the plan document.  The FT William Adoption Agreement sets the Valuation Date in Section H5 as the last day of the year, quarter, or month, as daily, or as a fill in the blank.  The BPD references the AA and adds the Plan Administrator can call for a special valuation for the assets in case of a distribution, asset transfer or division of assets from the plan that are not daily-valued to protect the plan.  The BPD does not have an explicit formula for determining the amount available for an in-service withdrawal and leaves it up to the PA to adopt a procedure.  Similarly, the PA can spell out ordering rules.

That being said, from the days before daily valuations became industry standard, termination distributions and interfund transfer typically are based on the valuation following the date of payment or the effective date of the transfer request.  In cases where there is an immediate need for a payment (hardships or often death payments), typically the amount is based on the prior Valuation Date less any interim payments or expenses, plus any contributions.

In terms of ordering, if the plan also has daily-valued assets, either amounts were based pro-rata across all funds, or the daily funds were used first before tapping the pooled accounts. 

  • Check the document for the frequency of the valuation. 
  • If there are pooled accounts, consider asking if the pooled accounts have a daily value available - many do. 
  • If assets are held in a mix of daily accounts and periodically valued pooled accounts, then the adoption agreement should say so. 
  • The PA should decide on the procedure for allocating income in the pooled account, and should decide on how amounts will be determined for each plan event requiring a movement of assets in or out of the pooled account. 
  • Participants should be given a copy of these procedures.

And, I believe that Bird is correct that the feature of an in-service withdrawals is a protected benefit and cannot be taken away from individuals who have met the eligibility to take such withdrawals from the plan (e.g., like age 59 1/2, 5 years of service for NEC...)

 

 

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