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Protected Benefit?


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So we have a plan that currently states if a terminated participant's vested balance is under $5k, they can take the withdrawal immediately. If over $5k, they can't take it until they've incurred 1 Break-In-Service. They want to change the provisions to say only terminated people with vested balances under $1k can take their withdrawal immediately. If over $1k, they have to wait until the close of the first full year that they've been credited with less than 500 work hours (i.e., exclude vacation time and/or sick time hours that were paid)...so not a true "Break-In-Service" by definition.

Does anyone see any issues with making such a change? Could any of this constitute a removal of a protected benefit??

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Are you dealing with "can' or must take a distribution. If you are dealing with the non-discretionary involuntary distribution of vested balances under $5K, then I think things are pretty wide open. For example as long as you stick with the $5k "ceiling" you can raise and lower it without violating 411(d)(6). This is from the regulations...

(v) Involuntary distributions. A plan may be amended to provide for the involuntary distribution of an employee's benefit to the extent such involuntary distribution is permitted under sections 411(a)(11) and 417(e). Thus, for example, an involuntary distribution provision may be amended to require that an employee who terminates from employment with the employer receive a single sum distribution in the event that the present value of the employee's benefit is not more than $3,500, by substituting the cash-out limit in effect under § 1.411(a)-1 1©(3)(ii) for $3,500, without violating section 411(d)(6). In addition, for example, the employer may amend the plan to reduce the involuntary distribution threshold from the cash-out limit in effect under § 1.411(a)-1 1©(3)(ii) to any lower amount and to eliminate the involuntary single sum option for employees with benefits between the cash-out limit in effect under § 1.411(a)-1 1©(3)(ii) and such lower amount without violating section 411(d)(6). This rule does not permit a plan provision permitting employer discretion with respect to optional forms of benefit for employees the present value of whose benefit is less than the cash-out limit in effect under § 1.411(a)-1 1©(3)(ii).
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