Do participants who terminate before a new valuation and paid out base

[Guest Cliff Langwith]

Participants in company Profit Sharing Plan with plan year end of June. Annual valuations. Terminated employees are paid their balance from the most recent valuation period. If earnings are due - a second check is issued. What happens if there is a net loss and the participant looks to be overpaid?

[alanm]

I think you ask for the money back, I have in many instances

and most participants pay- but if they don't, short of suing them there is not much you can do. There was a court case about this, what follows in a excerpt.

Several participants who received incorrect benefits estimates sued Chase. They sought damages based on the amount of benefits set forth on the incorrect statements. In effect, they argued the erroneous benefits statements became part of the plan and that Chase was bound to honor the statements, mistakes and all. Additionally, these participants argued that estoppel principles required Chase to honor the erroneous statements and that Chase was liable for the communication error because it breached its fiduciary duties.

In a refreshing, well-reasoned decision, District Judge Charles Siragusa ruled in favor of Chase. First, the court concluded that the incorrect benefits estimates were informal communications that did not amend or become part of Chase’s plan. The court next addressed the plaintiffs’ estoppel claims. Courts in the Second Circuit (Connecticut, New York and Vermont) recognize estoppel claims under ERISA only in “extraordinary circumstances.” A plaintiff must show that there was a promise, the plaintiff relied on the promise, injury was caused by the reliance, and an injustice will occur if the promise is not enforced. The court held that to have the requisite #&147;extraordinary circumstances” required to establish a valid estoppel claim, the plaintiffs would have to show that Chase’s actions were tantamount to fraud. Because there were no facts supporting such a finding (in fact, the court found the incorrect benefits estimates were the result of an honest mistake), the court rejected plaintiffs’ estoppel arguments.

[Guest michaelv]

Most (all?) plan documents should contain language on how soon participants can be paid out after they terminate employment. "As soon as administratively feasible" can give you a leg to stand on if you choose to wait until the valuation is done.

If it is not in conflict with the plan document, what we've done in some instances, where we expect there to be an earnings loss for the valuation period, is to pay out 80% of the benefit, based on the previous valuation balance (plus contributions, minus withdrawals, or whatever other non-earnings activity that you are aware of). After the plan is valued you can then pay out the remaining amount based on the valid account balance.

[Guest Benefits Lady]

The Plan document will tell you what valuation date to use. You have assumed that you use the next valuation date after termination. However, some plans say that the participant's benefit is to be valued (regardless of when distributed) on the valuation date immediately preceding termination of employment, for example. If the plan has that type of language and the plan had investment losses in between the time of the distribution and last val date, then other participants share in the losses, but the participant requesting the distribution does not. I hope that makes sense. Bottom line is to be sure to check the document for the definition of "Valuation Date".

[Guest Cliff Langwith]

Thanks for the information, everyone.