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Mandatory Cash Out Amount - $1,000 limit


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The plan document specifies that the $1,000 limit for mandatory cash outs and $5,000 limit for mandatory rollovers. What if the participant has about $1,020 in the account and the distribution processing fee is $50 (so the amount after the fee is $970). Would a direct distribution or a rollover be processed?

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No - because the amount payable to the participant is <$1000 after the fee. The fee is not considered part of the distribution.

However, if the account is daily-valued, I wouldn't risk playing the market that close to the line. You process it as a cash payment today, but if it turns out after the market closes the investments went up 5%, and whoops, now it's over $1,000 even after the fee.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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CB are you saying to just send a check?  I don't think you can.  Rules are the vested account balance has to be less than $1,000.  It's not.  The rules don't say vested account balance net of fees...

 

Vlad, do you know if these people have received paperwork (or instructions on how to begin the distribution online) in order to get their money and an admonishment that they will get a check if no election is made?  If not, I suggest you just send the amount to an IRA, b/c chances are the check will come back as undeliverable.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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I think you could get away with it, if you apply the fee first, before processing the distribution.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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44 minutes ago, BG5150 said:

CB are you saying to just send a check?  I don't think you can.  Rules are the vested account balance has to be less than $1,000.  It's not.  The rules don't say vested account balance net of fees...

Actually, the rules apply based on the amount of the distribution. It looks to me like the distribution amount in this case would be $970.  As noted, if the market goes up and the distribution ends up being more than $1,000, it gets auto-rolled.

 

Quote

 

401(a)(31)(B)(i) In general.—In case of a trust which is part of an eligible plan, such trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if—

(I) a distribution described in clause (ii) in excess of $1,000 is made, and

(II) the distributee does not make an election under subparagraph (A) and does not elect to receive the distribution directly,

 the plan administrator shall make such transfer to an individual retirement plan of a designated trustee or issuer and shall notify the distributee in writing (either separately or as part of the notice under section 402(f)) that the distribution may be transferred to another individual retirement plan.

 

We use an auto-rollover IRA provider that accepts amounts under $1,000 and have the auto-roll provision apply to all distributions not in excess of $5,000, so we don't have this issue. 

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In our document, the automatic distribution is based on the vested account balance at the time of the distribution.

It is the value of the payout that determines if the money goes to an IRA.

So, if the VAB (in some of the adoption agreements) is over $1,000 you cannot initiate the washout even if the resulting distribution is under $1,000.

In the case of the OP, if the AA allows for auto-distribs at $5,000 I think it's okay.

I doesn't matter if the plan doc allows for auto-rollovers, the adoption agreement must allow for it, too.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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On 6/27/2020 at 9:59 AM, BG5150 said:

It is the value of the payout that determines if the money goes to an IRA.

So, if the VAB (in some of the adoption agreements) is over $1,000 you cannot initiate the washout even if the resulting distribution is under $1,000.

Those two statements are contradictory.  I think a reasonable interpretation of "vested account balance" is what you are entitled to.  I think the question is "who is stopping you?"  If it is yourself I'd re-think.

Ed Snyder

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I don't see it as contradictory at all.

 

1. Read the document to get the cashout threshold. It will probably be $1,000 or $5,000. Is the vested account balance over that? (Don't forget to check to see if a rollover account is part of that balance!) If yes, proceed with the distribution process. Send your letters, make your phone calls, do your internet searches.

2. When the paperwork comes back, or you realize you have a missing participant AND the vested account balance is less than the threshold, do the distribution. If the gross distribution is over $1,000 you need to roll it over to an IRA. If it is under $1,000 you can a) send the participant a check if you know where they are or b) send it to an IRA if you cannot locate them.

 

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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4 hours ago, BG5150 said:

I don't see it as contradictory at all.

Not to drag it out but...

"It is the value of the payout that determines if the money goes to an IRA."  (Literally, the payout is net of fees.)

"So, if the VAB (in some of the adoption agreements) is over $1,000 you cannot initiate the washout even if the resulting distribution is under $1,000."  (But the value of the payout is "the resulting distribution" so the first quote says you can process the payout.)

Ed Snyder

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I would say so.  From the Datair BPD:

Mandatory Cash-out. The Employer may elect in the Adoption Agreement to require the mandatory distribution of a Participant's vested Account balance if its value, determined as of a date following the Participant's date of termination of employment with the Employer, is equal to no more than five thousand dollars ($5,000) (or some lesser threshold amount as elected in the Adoption Agreement). If a distribution is required under this provision, the Participant will receive an immediate cash-out of his vested Account balance and no further benefits will be payable from the Plan. If the value of a Participant's vested Account balance exceeds the threshold amount, an immediate cash-out shall not be made unless the Participant, and if applicable, his spouse, or his Beneficiary consent to such distribution.

Nothing in there talks about distribution amount.  Only account balances.  Furthermore and conversely, the automatic rollover rules only mention distribution amount, not account balance:

Automatic Rollovers. Effective for distributions on and after March 28, 2005, in the event a. Mandatory Cash-out distribution is greater than one thousand dollars ($1,000), or some lesser amount, in accordance with the provisions of Subsection 2.5.3(c), if the Participant does not elect to have such distribution paid directly to an Eligible Retirement Plan specified by the Participant in a Direct Rollover or to receive the distribution directly in accordance with Subsection 2.5.3(a), then the Plan Administrator will pay the distribution in a Direct Rollover to an individual retirement plan designated by the Plan Administrator. The Plan Administrator shall select an IRA trustee, custodian, or issuer (the "trustee") that is unrelated to the Employer, shall establish the IRA with that trustee on behalf of the terminating Participant who fails affirmatively to elect a Direct Rollover of a cash distribution, and make the initial investment choices for the account. For purposes of determining whether a mandatory distribution is greater than one thousand dollars ($1,000), the portion of the Participant's distribution attributable to any rollover contribution is included.

So, to me you don't get to rollovers until you satisfy cash-out threshold.

 

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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