Unlike a Plan with daily recordkeeping, annual valuation plans calculate each participant’s share of the total account balance only once a year. Distribution requests received by 12/31 of a specific year can only be processed after that year’s work is completed, which is typically in the middle of the following year (hereinafter referred to as Y). A TPA’s work for annual plans includes collecting the final census, calculating contributions, performing a myriad of tests, preparing the individual participant statements and preparing the Plan Tax Return Form 5500. Only after the statements are completed can distributions be processed.
But what happens if you submit a distribution request after 12/31 and in the beginning of a new year (Y)? In this case, you will need to wait over a year (until the middle of the following year) for your distribution to be processed. This is because you are a participant in year Y and, therefore, will share in any earnings (or losses) for year Y. This process prevents terminated participants from having an advantage over others. Say, for example, that a terminated participant, Joe, is watching the overall “market” and sees a huge rise in Q1 of year Y. Joe decides he is not going to submit a distribution request at that time but rather wait until the end of the year. But what if Joe saw that the market was down in Q1. He then puts in a request for a distribution. If that distribution was processed based on his account balance as of 12/31 of the prior year, Joe would avoid sharing in the losses – thereby increasing the share of losses for the remaining participants.
By processing distribution requests based on the 12/31 balance of the year when the request was received, the Plan maintains a level of “fairness” for all participants.