I have a plan that is still on a quarterly valuation system. About two years ago (when losses were mounting) the plan was amended on the advice of a consultant to require the retiring
plan participants to share the pain of all investment losses as
of the date of their departure.

Basically, the plan takes the required IRS withholding from the
distribution. Then it withholds an additional 15% until such
time as the administrator can determine the true value of
the person's account on the day of his distribution. This generally takes 60-90 days. When the administrator has the final number he will subtract any losses (or add gains) to the remaining monies and make a final distribution.

Recently a participant became irate and threatened to sue.

How is this problem handled by other plans? Is our method correct? Any IRS or DOL concerns?

Thanks for the input.

Other plans would just delay the distribution until after the quarterly valuation was performed.

All of our 401(k) Plans are quarterly-valued. We agree that departing employees share in investment returns but we do this by processing distributions after the end of the quarter in which employment is terminated.

Interesting thought: when the market turns around and is earning 6-8-10% a year, will this Plan Sponsor ADD money to the distribution amount until they can determine the true value of the account? I wouldn't think so. Our advise to them would be to hold all distributions until after the end of the quarter in which employment is terminated.

Hmmm.
Nothing was said about the plan participant actually applying for a distribution. Most plans require an affirmative action, assuming the balance is over $5K.

In the original post, I wonder if there was a 411(d)(6) violation.