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Contributory Defined Benefit Plan

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A governmental contributory defined benefit plan covering full-time employees of participating employers equires participants to contribute 5% of compensation. Participant contributions are separately accounted for and credited with a fixed rate of interest set by the trustees of the plan.

If as a result of reduction in hours a full-time employee becomes a part-time employee, he/she is deemed to be an inactive participant and all employer and employee contributions cease unless and until the participant again becomes a full-time employee.

If a participant remains in inactive status for more than 2 years (but is dstill employed with a participating employer as a part-time employee), the plan provides that 100% of his/her mandatory contributions plus interest will be involuntarily cashed out if less than $1,000, or rolled over to an IRA if $1,000 or more.

As the participant in inactive status has not terminated employment, wouldn't such a cash-out provision violate IRC section 401(a) which prohibits distributions from a pension plan prior to retirement, death, disability or other termination of employment? (Assume that the cash-out provision does not apply in cases of participants who have attained normal retirement age and participants who are vested.)

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