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Involuntary Distributions

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3 replies to this topic

#1 Fred Payne

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Posted 23 September 2002 - 06:57 PM

I first searched the archives to see if this question had been answered. It had been asked, but no one gave an answer!

If because of the lousy market we've all been enjoying a terminated participant's vested balance drops below $5,000, can the Sponsor affect an involuntary distribution from a DC plan? Let's assume for the discussion there is no rollover balance in the participant's account.

My memory has it that if the balance was ever over $5K, the involuntary distribution was not possible. But something tells me that was changed (although I can't find a source.) Everything I read now refers to the "present" balance being under $5K.

I suspect that the answer to my question is Yes.

#2 Mike Preston

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Posted 24 September 2002 - 03:50 AM

I suspect so as well. My recollection is that the reference you seek is in 1.401(a)-20 and it applies to the circumstance where an individual has benefits in excess of the applicable threshold ($3,500 or $5,000) on an annuity starting date and later accrues additional benefits therefore requiring that all such benefits be subject to the annuity/involuntary cash-out rules. This is purely from memory, though, as I don't have time to do an exhaustive search. I believe EGTRRA changed the rule, however, such that a cash-out is now allowable with respect to a current distribution amount being less than $5,000 even if there was a prior annuuity starting date and the threshold was exceeded on that prior annuity starting date. Don't take my word for it, though, until somebody finds the cites, as this is all purely from memory.

#3 Therese


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Posted 24 September 2002 - 12:08 PM

I think the look-back rule used to be in reg. 1.411(a)-11. The new final regulations do not include it. The timing for distributions to previously terminated participants who fall under the new cash-out limit appears to be restricted - see reg.1.411(a)-7(d)(4)(vi). The plan document would also have to be amended if it does not already provide for the new involuntary cash-out rules.

#4 RTK


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Posted 24 September 2002 - 04:15 PM

The lookback rule for purposes of the vesting requirements was previously in 1.411(a)-11(c)(3) and for purposes of the j&s requirements was in 1.417(e)-1(B)(2). It was totally eliminated by IRS final regulations (TD 8891) published in the July 19, 2000 Federal Register. Note that under the final regulations, for plans subject to the J&S rules, consent is required for involuntary distribution after the annuity starting date, regardless of form or amount. This change and the increased cash out limit were permitted to be implemented administratively prior to the GUST amendment so long as the implementation dates were reflected in the GUST amendment.

The cash out rules in 1.411(a)-7(d)(4) permit "service" to be disregarded. Notably, under the final 2000 IRS regulations amendments, a distribution is deemed to be made due to the termination of participation in the plan for purposes of the involuntary cash out rules if made no later than the end of the 2nd plan year following plan year termination of participation occurred, or if the distribution would have been made by the end of that 2nd plan year but for the fact that the accrued benefit exceeded then cash out limit.