They said it best in This Is Spinal Tap, there is a fine line between being clever and stupid.
Behan Bros, Inc. Retirement Plan is an annual valued 401(k) plan with a valuation date of December 31st. As with many plans, there is an ability to create a special valuation date.
Well, participants who terminated in 2018 were told that in early 2019 that they were entitled to a distribution based on December 31, 2018. Even though the market was up in 2019, they were told that the plan sponsor would not create a special valuation date. These former participants decided to keep their money in the plan. They then requested a distribution of their account balance in January 2020, based on a higher December 31, 2019, balance. Through March, these former participants were told that the annual valuation was not done. Then COVID-19 struck and the markets went south. On March 25, the plan sponsor indicated that because of the volatility in the market and to protect plan assets, they would create a special valuation date. Based on the new valuation date, two former participants would have received $20,000+ less, each.
The troubling aspect is that these former participants asked for distribution in January and the plan sponsor delayed payment because the valuation wasn’t done. Add the fact that the owners have account balances in the plan and you have the recipe for a nice lawsuit. Special valuation dates become problematic if you have participants with outstanding requests, based on a valuation with a vastly higher account balance.
