DISTRIBUTIONS (1 of 4)

Distribution planning is one of the most important components of the planning process. Even if you had a detailed plan in place when you established your plan, chances are that things have changed. You should perform a distribution analysis annually. Here are some things to consider.

• Will you be required to make payments to participants in the next year? Here are the rules for determining when you must begin offering participants an opportunity to request a distribution:
  
  
  • The Internal Revenue Code (The Code) requires that payments to participants that terminate as a result of death, disability, and retirement (as defined by the plan) begin within one year after the end of the plan year of the termination. For example (assuming a 12/31 plan year end), if a participant terminates after meeting the retirement provisions of the plan on June 29, 2005, the participant must be paid out after the December 31, 2005 allocation is completed (which should be sometime in 2006), and the payment must be made by December 31, 2006.
    
    
  • For other separations of service, payment is required one year after the end of the fifth plan year after the year of termination. For example (assuming a 12/31 plan year end), if a participant terminates on June 29, 2005, the participant must be paid out after the December 31, 2010 allocation is completed, and the payment must be made by December 31, 2011.
    
    
  • If there is an outstanding ESOP loan, payments to participants terminating for reasons other than death, disability, or retirement can be deferred until the close of the plan year in which the loan is paid in full.
    
    
• What distribution provisions are in your plan document? Are they more liberal than the above-mentioned statutory requirements? In many cases the distribution provisions provided in the plan document will mirror the Code’s requirements, but you should review your plan document to see if there are any additional distribution provisions in your document and treat those provisions as the minimum. You should also identify if there are any other distribution requirements. Examples include in-service withdrawals, early retirement distributions, and nonstatutory diversification distributions (which are generally treated as in-service withdrawals and not diversification distributions).
   
• Do you have a written distribution policy? If not, do you have an informal distribution policy that is not in writing? It is strongly recommended to have a written distribution policy and review it regularly. Some plans prepare a distribution policy every year. This is one of the most important items of the planning process. I strongly recommend that you do not delay preparing for this item.

PLAN EXPENSES

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