by | Aug 15, 2023 | Institutional Services

As situations arise during the plan year, it’s always better to double check the plan provisions rather than address a plan failure after the fact. In some situations, it’s easier to ask for forgiveness rather than permission, but that isn’t true in retirement plans. Correcting mistakes can be very costly. Do not hesitate to reach out to us for clarification on what the plan allows. For example:

When a participant (staff or owner) requests a distribution, there is a process to follow to ensure the distribution is permitted by the plan. Questions to be considered:

  • Eligibility:
    • If a request is made for an in-service or hardship distribution, does the participant satisfy the requirements?
    • For terminated participants, does the plan permit distributions immediately or is there a waiting period defined in the plan document?
  • Available funds:
    • Is the type of distribution limited to employee contributions or are employer funds available?
    • Is the participant’s vested percentage sufficient if taking employer funds?
    • Has the vesting been updated for current plan year hours, if applicable?
  • Documentation:
    • Has the necessary online or paper request been completed?
    • Has spousal consent been obtained, if required?
  • Type of distribution:
    • Is the distribution only permitted in cash or are in-kind distributions permitted? In-kind refers to the transfer of assets to an IRA or another plan rather than liquidating shares and distributing the cash.
    • In the case of an in-kind transfer from a self-directed brokerage account, is the transfer to an IRA or another retirement plan (qualifying it as a rollover distribution) or to another account within the same plan (not a distribution)?

Contributions to the plan must be made per the provisions of the plan. If an employer contribution is usually funded after the end of the year but you find you have funds available during the year, a deposit may have to wait.

  • If the funds are pooled in one account, it’s important to be sure the total employer contribution funded does not exceed the deductible amount for that tax year. This won’t be known until after the end of the year when total compensation figures are available.
  • If the funds are in separate participant-directed accounts, the determination of how much to deposit to each participant is based on payroll as well. Funding some participants early, especially the owners, can also be a discrimination issue.

Are there changes to the company being considered? These events should be discussed prior to the effective date of the change because the plan can be greatly impacted.

  • Changes include buying another company, selling the company, or merging into another one.
    • Depending on the details, it may require plan termination and affect whether the participant account balances can be distributed or if they must be transferred to the other party’s plan.
    • The plan document may need to be amended for eligibility, vesting and other provisions.
  • Change in current ownership.
    • Some plan contribution formulas are suitable for the current demographics of the plan, meaning testing requirements pass. Changes to ownership may negatively affect test results so plan design changes may need to be considered.
    • Since ownership can be attributed to family members, hiring a relative can dramatically affect certain types of contributions and testing.

Any time funds are going into the plan or leaving it, there are terms of the plan that must be followed. If you find the provisions no longer suit you and your employees, an amendment can be considered to make the necessary changes. It is very important to operate the plan in accordance with the plan document, so please ask for clarification as needed!

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