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.
There are three exceptions to the above processing timeline:
A) If a Participant terminates employments in December and submits a distribution election form by the end of January and agrees in writing to waive any earnings they are due between 12/31 of the prior year and 12/31 of the current year, we can process their distribution using the 12/31 valuation of the prior year which will not be completed until Q3 or Q4 of the current year. They will not be forced to wait for the 12/31 valuation of the current year which will not be completed until the Q3/Q4 of the following year.
B) Loans, Hardships, and RMDs. For loan withdrawal purposes, the most recent available valuation is used to determine loan limits and amounts available for withdrawal. For RMDs, the 12/31 balance of the prior Plan Year is used to determine the amount to distribute. RMDs are processed in Q4 each year after prior-year valuations are completed in Q3. Hardship withdrawals get the same treatment as Loan withdrawals (the most recent available valuation is used.)
C) In-Service Withdrawal (ISW). A maximum of 10% of the vested account balance (as of the most recent valuation) can be distributed. A request for more than 10% of the vested balance will be subject to the same processing timeline detailed in the opening paragraph above.