Timing of lump sum distributions

Can anyone provide a code citation that defines when a participant in a defined benefit plan (CB in this case) is considered to have been paid a lump sum distribution? Date funds leave the trust, or date participant has control of the funds? Or something else? I've looked, but I'm not a very good looker, and hoping someone here can at least point me in the right direction. Even if no citation, would love some opinions on this. 

This is related to some mandatory cash-outs that were started the last week of Dec 2023 from a calendar-year CB plan. The Plan wired the required funds to the distribution custodian on 12/26/2023 and provided participant hypothetical balances as of 12/31/2022 (Plan Doc does not allow pro-rata interest thru ASD, just the last-day interest credit). TPA states that since funds were sent to distribution custodian before 12/31/2023, the participants are considered paid in full as of that date.

We've since learned that several of the participants did not receive funds until well into February 2024 (delays in responses, paperwork, etc.). Anyone feel like they were shorted their 12/31/2023 interest credit?

Thanks in advance!

I know of plans that work that way, but I would be on the side of the participants.  If they didn't have the check in their hands, I don't see how you can consider them to be paid.  Personally I think the concept of annual interest credit is a 411(d)(6) violation, which is the real issue with your post.  That fact that some pre-approved documents let you do it doesn't mean it complies with the law.  

Unfortunately, only real course of action would be to hire a lawyer but since these are small amounts, the sponsor knows that is unlikely to happen.   I am not aware of any regulation that defines it, but common sense would say, "if it don't have the check, then I wasn't paid".    Your lender doesn't care when you told the bank to send the check.

let's not overlook the fact that the actuarial equivalence definition might have changed because payments did not happen in 2023.   Dependent on plan provisions, definition of actuarial equivalence, and interplay with 417(e) rates all kind of messy things could have happened.

The annuity starting date for a lump sum is the date that all requirements for issuing the payment have been met, including notices, spousal consent and other timing issues. If these were cash outs under the terms of the plan - so if everyone received their 402(f) notice at least 30 days before 12/26, then I think you can have that as an ASD. If administrative delay pushes that into January, I think that's OK. February is questionable. 

I don't know where in the regs, but it is the definition of annuity starting date that I think you want to reference. 

I really appreciate everyone's input!

Regarding your original question, Code Sec. 402(a) provides that, "[e]xcept as otherwise provided in this section, any amount actually distributed to a distributee by an employees’ trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed, in accordance with section 72 (relating to annuities)" (emphasis added).  The transfer of funds by the Plan Administrator to the "distributing custodian" is not an "actual" distribution to the participant.  The distribution would occur when the distributing custodian actually distributes the check to the participant.  Under your facts timing is important because it affects the participants' year of taxation for the distributions.

As to the issue of whether interest should be added, what does the plan state is the annuity starting date... usually the first day of the month following the later of....?  If paid after the annuity starting date, seems like there should be an actuarial increase for late payment unless the plan provides for RASD.    

If an actuarial increase is required, the service/custodial agreement between the plan and the distributing custodian should be reviewed to determine the custodian's obligations to distribute the payment to the participant following receipt of the amount to be distributed to the participant.  If under the terms of the service/custodial agreement, the custodian was delinquent in paying the amount, it should pay the actuarial increase, if any.  Seems like this would be spelled out in the agreement.  Also, review the float income provision (there should be one or there may be a fiduciary issue) because it usually requires that amounts are distributed within at least a reasonable period after being provided to the custodian (if not within a set number of days or period).