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changing timing of force-outs


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I'm taking over a plan that has immediate force-outs in the document for VAB <$5,000.  I suspect that provision was not followed by the prior TPA, and based on how the assets are set up (individual brokerage accounts) and the fact that we won't be monitoring the plan on a daily basis, it doesn't seem like the right fit for this plan.  Is it a cutback to change this to happening after the end of the year of termination in the document?  Thanks.

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20 hours ago, AlbanyConsultant said:

Is it a cutback to change this to happening after the end of the year of termination in the document? 

Yes.  You could change it for new participants and grandfather the current ones, but hardly worth the trouble and confusion.

But does it matter that much?  Paying someone with multiple sources from an individual brokerage account is going to be a hassle no matter what, at least if not 100% vested.  

Ed Snyder

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I agree, but this is not the kind of client who is going to be on top of things enough to tell us when someone terminates or to initiate the forceout themselves.  So I'm trying to save them from themselves by making the document reflect what will actually happen (i.e., we will swoop in after the end of the year, figure out what needs to happen, and do it then).

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Does your client's IRS-preapproved document allow choices or flexibility about when an involuntary distribution is provided?

Or do you have the luxury of an individually-designed document?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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§ 1.411(d)-4, Q&A-2(b)(2)(v) provides: 

(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)-11(c)(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)-11(c)(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)-11(c)(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)-11(c)(3)(ii).

Thus, generally a plan is permitted to add, delete, or modify provisions pertaining to automatic cash-outs without violating section 411(d)(6) so long as the end result is a provision that would otherwise comply with applicable law.  If you are worried about the extent to which the above paragraph permits stand-alone modification, then just delete the provision (permissible) and then re-add the provision (permissible, so long as the terms selected are permissible). 

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