I have a client that sponsors a profit sharing plan with a 401k feature.

The plan sponsor manages the investments.

2 vested employees with balances between $1,000 and $5,000 recently terminated.


Since the plan does not have individual sub accounts for each participant (but one pooled account) , how would we calculate the amount due the participant? That is, the amount in the plan changes every day, so if we provide a client the portion attributable to the terminated employee based on the account as of say 10/1/08 and the client isn't going to actually make the distribution until a later date, can we lock in the amount based on the value computed as of 10/1?

The plan administrative forms, etc. provide for automatic lump sum payment for amounts less than 5k, but requires consent if the amount is over 1k. What is the purpose of consent when the distribution is automatic lump sum? I suppose they want to hear if it is a rollover or a cash payment, etc.

Finally, say $2,000 is the non vested portion forfeited. In order for such amount to be used to reduce the next year's contribution do we just keep track of the forfeited amount just like any other account balance and then use it as the reduction in contribution? Of course the same dilemma of changing daily values occurs. Perhaps they can create another suspense account for the forfeited amount?

Thanks.

Your plan document will address this. You are paying out the amount as of the "LAST VALUATION DATE" prior to payment.

If the plan states payment is immediate after termination, then you are paying out based on the value as of the last valuation date stated in the plan (i.e. Last day of the Plan Year). The participants' accounts do not fluxuate merely because the investement values in the trust changed. On the valuation date (especially those other than daily) there would be a allocation of the earnings (and contributions during the year) to the participants' accounts. The recordkeeper will perform this function and walk you through it. The forfeiture will be handled under the plan as well. It appears that you have a 'traditional' plan (commonly referred to as balance forward).

This appears to be the root of your confusion.

Hope this helps.

Check the plan document for what it provides for valuation dates. The last day of the prior plan year is a legally required valuation date. The plan might specify more frequent ones. If your pooled investment plan requires daily valuation, you'll need to determine what percent of the whole pool belongs to each of these pending distributees and then instruct the investment house to pay that percent out of the assets on the day checks are cut. If not daily valuation, you can base payment on the percentages applied to the most recent valuation date called for by the plan documents.

Since March 2005, for distributable amounts over $1,000, you cannot force a distribution out (i.e. without the consent of the pending distributee) unless you pay it over into an IRA that the Plan Administrator sets up for that person, and notify the distributee of the IRA rollover and where the IRA is custodied. It must also be a "low cost" IRA. Alternatively, many plans simply reduced to $1,000 the threshhold at and below which auto payouts would be made in the absence of the former employee's consent, if he/she is younger than the older of age 62 years or normal retirement age.

Yes and Yes. But before you assume that 'next year's contribution' is the one to which the forfeiture applies, check your plan document. That might be the correct time, but you should make sure what the plan document specifies as the time for re-allocating the forfeitures.

In this example the plan year ends 3/31/08.

The valuation date is 3/31/08.

The first plan year is 4/1/07 to 3/31/08.

The former employee did not make a 401k deferral during the plan year and thus had a balnce of $0 as of 3/31/08.

The company made a profit sharing contribution of $3,000 for that former employee on 7/1/08 for the 3/31/08 plan year.

The employee terminates 8/1/08 and has made no other deferrals, contributions.

So based on what I say above the terminated employee could receive a payment of $3,000. That is, his account balance at 3/31/08 ($0), plus receivables for 3/31/08 of $3,000.

Does that sound correct?

The plan administrator can include any other date he deems necessary as a valuation date for the valuation of participant accounts, but I presume he does not have to and can just go with the 3/31/08 valuation date if desired. Make sense?

Thanks.

First thing, check the plan document regarding what it provides about valuation dates. Some but not all are drafted so that the plan administrator may do interim valuation dates in its discretion. If so, I'd be careful not to do so in a fashion or way that favors HCEs. That could cause a BRF discrimination problem. For example, doing an interim valuation just before a NHCE distribution so that he/she suffers part of downswing in the stock market, but not having done so a month ago just before you paid out to an HCE based on 3/31/2008 valuation would be problematic.

Some plan documents require daily valuations. Though not common, the plan document you are dealing with could call for something in between annual and daily valuations.

Otherwise on your scenario, I would add the $3,000 (unadjusted for investment earnings/losses since made on 7/1/2008) to the 3/31/2008 balance ($0.00) for that employee. The $3,000 is deemed to have been made on 3/31/2008 if it was made by the due date (as may have been extended) on the contributing employer's tax return. If 3/31/2008 is the proper valuation date to be working from, that means that $3,000 is the dollar amount you should be working with.

Check for the distribution timing provisions as well. It is relatively common for pooled accounts to say that the distribution is made after the end of the next plan year.

You are correct. The document will also include a method for allocating earnings. This method will likely be a Beginning of Year method that does not include contributions for the year in calculating the basis for earnings. Therefore, the year end receivable for the first year participant is the balance that will be paid out (until the plan is valued again on 3/31/2009 where the $3,000 would be his beginning of the year balance for the allocation purposes). This is a typical balance forward plan.

As to whether the plan administrator may arbitrarily decide on the valuation date, I do not agree. However, the plan administrator may, in it's decretion, decide to amend the plan to provide for other valuation dates (ie. quarterly or even daily). As it stands, it appears that you have a cookie cutter balance forward plan. Just pay out the $3,000 from the plan (assuming he is vested in the entire amount).

However, you should verify the language within your document (as always) prior to doing this. Everyone on this board agrees with this, because the absence of this plan document language always begins the guessing game. So, keep in mind, my comments are only my guess of what how this document would read based on my experience with balance forward plans.