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Payment Options for a Terminated Plan


Guest Sara H
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Guest Sara H

Is the only payment option for a terminated plan a lump sum cash distribution or can the employee avoid taxation by rolling the distribution into an IRA? Also, is the employee subject to the 10% penalty since the distribution was not due to a termination of employment? Thanks!

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Not sure what type of plan you are discussing.

If you mean a DB plan, the normal form of payment will be some form of annuity, but the plan termination will usually give rise to all participants (other than those already retired) having an option of receiving the plan's promised annuity or a lump sum. A rollover to qualified IRA will avoid the 10% excise tax as well as defer regular taxation.

If you mean a DC plan, the normal form is usually (but not always) a lump sum so that will likely be the only form of payment available upon plan termination.

In order to answer your question more precisely, we may need more facts.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest Sara H

Sorry for the lack of info. This is a DC plan -- a 401(k) & Profit Sharing Plan. The reason I'm asking is because the investment company is going to issue the employer one lump sum check for the entire plan balance and the employer is responsible for issuing separate checks to the participants. He is wondering if an employee wants to put the money in an IRA if he can issue the check directly to the IRA or if he has to issue it to the employee and they have to write a check to the IRA. Hope this helps to answer the question. Thanks.

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Qualification rules would REQUIRE that the plan give pts a direct rollover option. The direct rollover, if eleceted by the pt, may be accomplished either by writing the check directly to the IRA provider and sending it to the IRA provider, or by writing a check to the IRA provider and giveing it to the pt for transmittal to the IRA provider. If you write the check to the pt, it is not a direct rollover and would be subject to 20% withholding.

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Dowist is correct. However, from your second message, it appears that the investment company that holds the money may not be the trustee. If the company is the trustee, then the company is repsonsible for notifying participants about their options with respect to a direct rollover.

It sounds as if the investment manager is trying to wash their hands of the whole thing.

Also don't forget that various filings and forms are still required. For example, if an EE elects not to have a direct rollover, then there is a required 20% federal withholding (might also be some state withholding), and the trustee should also make sure that the IRS receives that. Then the EE should receive a 1099 form at the end of the year.

etc. etc., etc.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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