Distribution Options

A Nonqualified Deferral Plan (NQDP) plan document will generally define the time and form of payment of benefits for each event (this is a Rev. Proc. 92-65 requirement). The most common events that trigger a distribution are the following:

  • Retirement
  • Death
  • Disability
  • Termination
  • In-Service (pre-retirement) Withdrawal
  • Financial Hardship
  • Call Provision (ad hoc withdrawal)
  • Revising Distribution Options

The forms of payment offered generally depend upon the on the triggering event.

Most plans offer a variety of options, in order to provide the participant with retirement planning flexibility. The typical options are:

  • Lump sum
  • Periodic payments (annual, quarterly, monthly) over 5 to 20 years 
  • Periodic payments (annual, quarterly, monthly) over the participant's life expectancy

Death, Disability, and Termination
These events usually have plan provisions that result in a lump sum payout in order to avoid maintaining a liability on the books for a participant who is no longer employed. However, plans may also apply vesting provisions allowing participants to be considered eligible for retirement under the plan, and therefore eligible for delayed and/or annual distributions in lieu of an immediate lump sum.

In-Service Withdrawal
Most plans offer the participant the right to make a series of withdrawals in annual installments while still an active employee. The most common use of this option is the withdrawal of funds for college and education needs. Typically, a plan will allow four or five annual installments, beginning at some point in the future. To avoid constructive receipt issues, this election must be made at the time of ennrollment.

Multiple education accounts may be implemented at the plan level, allowing a participant to select a different beginning date for payment for each dependent (See Typical Plan Structure under Nonqualified Deferral Plans).

Financial Hardship
Most plans allow only a lump sum payment for financial hardship. Financial hardship is defined by Rev. Proc. 92-65 as an unforeseeable emergency that is caused by an event beyond the control of the participant or beneficiary and that would result in severe financial hardship to the individual if early withdrawal were not permitted. The plan must further provide that any early withdrawal approved by the employer is limited to the amount necessary to meet the emergency.

Call Provision
Many plans will also include a provision which allows participants to request, or call down, all or part of their vested account balance at any time. Typically, this is subject to a penalty in the form of a percentage which the participant must forfeit at the time a withdrawal is made. Allowing participants to call their balances without penalty would probably jeopardize the entire plan, with all balances immediately taxable under the constructive receipt doctrine.

Revising Distribution Options
Most plans have restrictions on the ability of participants to change their distribution elections. Typically, a full year must elapse between completing a change of distribution request and the payout. This prevents application of the constructive receipt doctrine. (See Martin v. Commissioner, 96 T.C., No. 39,1991). Some plans allow any change. Others may prohibit revisions to accelerate distribution - for example, a participant would be permitted to request receipt of their balances as a lump sum, then later request distribution over ten annual installments. However they would not be allowed to accelerate from a 10 year pay out to a lump sum. Some plans do not permit any changes. Allowing participants to make these revisions, increases administrative burdens.


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