Plan Termination: Participant’s Rights
As stated previously, participants become 100% vested in their accounts regardless of their length of service when the plan terminates, provided he or she has not been terminated from employment for at least five years as of the plan’s termination date. They also have the right to withdraw their account balances in full as a taxable distribution, or to roll over the account to another tax-deferred retirement vehicle. It is important to provide participants with the Distribution Request Form and its attachments, most specifically the Special Tax Notice Regarding Plan Payments. This notice outlines the taxes and penalties associated with receiving a taxable distribution from a qualified plan.
Once the plan has been terminated, it is important that the assets be distributed promptly. Generally, the IRS has determined that this must occur within a reasonable period of time, but no more than one year from the termination date. There is an exception to the general rule if a determination letter is filed for the terminating plan. In such case, final distribution can be deferred until six months following the issuance of the determination letter, if the date of the letter is later than one year after the plan’s termination date. If a determination letter is requested, distributions should be delayed until after the letter is received (except for ordinary distributions such as for death or termination of employment). If assets are not distributed promptly, it can compromise the validity of the termination. For example, in an audit, it may be determined that because plan assets were not distributed in a timely manner, the plan was not properly terminated. As a result, the distributed assets may become fully taxable, even if they were rolled over. As discussed in “Distributions” under Accessing Funds, there are only limited acceptable reasons for removing money from a qualified plan. If the reason provided is invalid, then the distribution is not allowed.
Therefore, if a participant delays submitting the Distribution Request Form, even after repeated attempts to notify him or her, it is in your best interest to discuss the options available to you with your benefits attorney or legal advisor. In some instances, you may be allowed to open an individual retirement account (IRA) on behalf of the participant and make a rollover distribution without his or her consent. The Program can help if this becomes necessary.
If the participant’s account contains an outstanding loan balance, the loan(s) will be defaulted and offset upon withdrawal or rollover distribution. Under the Basic Plan Document, the loan may not be rolled over.
Self-Directed Brokerage Accounts (SDBA)
If the participant has an SDBA, he/she can request a direct in-kind rollover of the securities held in the account (assuming the securities will be accepted by the receiving broker) by having the receiving broker send an Automated Customer Account Transfer (ACAT) directly to TD Ameritrade. This should be done after the Program has received the participant’s Distribution Request Form. The first ACAT request will automatically be rejected by TD Ameritrade, due to the fact that the assets are part of a qualified retirement plan and are subject to restrictions on distributions. TD Ameritrade will contact the Program to determine whether the participant is approved for a distribution. If the Program has received a Distribution Request Form, approval will be given to TD Ameritrade. Then, when the receiving broker submits the ACAT a second time, it will be processed.