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Mandatory Distributions under $5000


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I have another mandatory distribution question. My understanding is that if a retiree has an account balance over $5000, participant consent is required before a distribution can be made. However, if the balance is between $1000 and $5000 then per 401(a)(31) the plan has to notify the participant that they can direct a rollover to a named bank or take a lump sum, but if there is no response from the participant then the plan must do a direct rollover to an IRA selected by the plan. Thus my interpretation is that if the balance is under $1000, no such rollover notice is required and the plan can write a check to the participant and W/H 20%. However, if the balance is less than $200, mandatory 20% W/H is not required. Is there agreement on my interpretation?. Finally, what about spousal consent? Does the plan document have to specifically state that distributions of balances less than $5000 does not require spousal consent. What if the plan states that balances over $5000 require spousal consent. Is that sufficient?

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First, the plan document must allow for involuntary rollovers; not all of them do.  One place I worked, put the cap at $1,000 so they did not have to worry about forced rollovers.

Second, will someone please show me the exception to providing the 402(f) notice if the distribution will be less than $1,000 or $200?

It doesn't matter whether, or how much, taxes will be taken.  If the distribution is eligible for rollover at all, the notice MUST be given, in my opinion.  The special tax notice explains a lot of things other than the 20% withholding.  It mentions withdraws under age 50 1/2.  They types of accounts that may accept a rollover.  It explains direct and indirect rollovers.  It explains treatment of loans, Roth, company stock.

I see nothing in 402(f) that mentions any thresholds.

(OK, I probably wouldn't send one for a distribution under $10, as no 1099 is generated for that.)

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QKA, QPA, CPC, ERPA

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I will let others debate the 402(f) issue.   I can't for the life of me understand why a plan doesn't send forms and notices to everyone first  I don't think I have ever not convinced a client to do it on the grounds it is the right thing to do to give the person a chance to roll their money over without withholding.   I even have gotten them to send them to people who have <$200. 

Its their money give them some say and control over it already! 

I will get off my soap box now. 

And yes it all has to be in the document.   I have had client's whose plan only forces out <$1,000 account balances.  

I have over the decades had plans that said they didn't have to force anyone out and they didn't. 

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41 minutes ago, BG5150 said:

Second, will someone please show me the exception to providing the 402(f) notice if the distribution will be less than $1,000 or $200?

There is no exception for less than $1,000.  You have to give them notice before you do the involuntary distribution.

There is an exception to the WH requirements when the total distributions for the year is less than $200 (or for the first distribution of less than $200 if subsequent distributions gets you over $200). My understanding is that there is no exception to the the 402(f) notice requirement for distributions under $200, but some of the language in the notice will not apply to a distribution of less than $200.

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1 hour ago, RatherBeGolfing said:

but some of the language in the notice will not apply to a distribution of less than $200.

SOME.  But there is plenty that still applies.

QKA, QPA, CPC, ERPA

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

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On 10/15/2021 at 8:41 AM, BG5150 said:

First, the plan document must allow for involuntary rollovers; not all of them do.  One place I worked, put the cap at $1,000 so they did not have to worry about forced rollovers.

Second, will someone please show me the exception to providing the 402(f) notice if the distribution will be less than $1,000 or $200?

It doesn't matter whether, or how much, taxes will be taken.  If the distribution is eligible for rollover at all, the notice MUST be given, in my opinion.  The special tax notice explains a lot of things other than the 20% withholding.  It mentions withdraws under age 50 1/2.  They types of accounts that may accept a rollover.  It explains direct and indirect rollovers.  It explains treatment of loans, Roth, company stock.

I see nothing in 402(f) that mentions any thresholds.

(OK, I probably wouldn't send one for a distribution under $10, as no 1099 is generated for that.)

 

Regarding the exception for providing the 402(f) notice, it appears to apply to amounts less than $200. § 1.402(f)-1 , Q&A 1 says "

Q-1: What are the requirements for a written explanation under section 402(f)?

A-1: (a) General rule. Under section 402(f), as amended by UCA, the plan administrator of a qualified plan is required, within a reasonable period of time before making an eligible rollover distribution, to provide the distributee with the written explanation described in section 402(f) (section 402(f) notice)."

Since a plan is not required to allow a direct rollover of $200 or less, that would be the exception. What do you think?

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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8 minutes ago, Appleby said:

Since a plan is not required to allow a direct rollover of $200 or less, that would be the exception.

What is the cite for that?

QKA, QPA, CPC, ERPA

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4 minutes ago, BG5150 said:

What is the cite for that?

Notice 2020-62 . Do a control F and word search $200 https://www.irs.gov/pub/irs-drop/n-20-62.pdf

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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16 minutes ago, Appleby said:

Notice 2020-62 . Do a control F and word search $200 https://www.irs.gov/pub/irs-drop/n-20-62.pdf

Denise, the only mention of distributions of less than $200 in Notice 2020-62 is the paragraph in the sample notice explaining that withholding or a direct rollover option were not required, but that it is eligible for a 60 day rollover.

 

 

 

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How many plans do not allow for direct rollovers under $200?

All of our documents allow them without a minimum.  I never thought to choose otherwise.

Wouldn't it just be safer to send a 402(f) Notice to everyone?

And, Like RBG said, they are still eligible for the 60-day rollover, so I think the notice would still be required.

QKA, QPA, CPC, ERPA

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

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I guess if you want to keep it down to minimum effort for the <$200 balances can you send the notice with the check? 

I haven't really ever done that but it crossed my mind if a person really wanted to one step those payments to keep costs and efforts to a minimum that might be an idea.  

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44 minutes ago, ESOP Guy said:

I guess if you want to keep it down to minimum effort for the <$200 balances can you send the notice with the check? 

I haven't really ever done that but it crossed my mind if a person really wanted to one step those payments to keep costs and efforts to a minimum that might be an idea.  

That gets tough when you have a big provider potentially sending out dozens if not hundreds of these checks.  Often there is a central check issuing/mailing center and it is very difficult to add in a mailer, especially one that runs several pages.  The organization may be printing thousands of checks nightly; who is going to pull those checks? 

QKA, QPA, CPC, ERPA

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

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1 hour ago, BG5150 said:

That gets tough when you have a big provider potentially sending out dozens if not hundreds of these checks.  Often there is a central check issuing/mailing center and it is very difficult to add in a mailer, especially one that runs several pages.  The organization may be printing thousands of checks nightly; who is going to pull those checks? 

So what I am hearing there is it might be legal but practical issues might sink the idea anyway.

I have to admit any more we send forms and notice even to people who have balances under $200 to give people a chance to elect a rollover.   Most of my clients don't have a problem with that.   Although ESOPs don't have the number of small balances a 4k plan does.  In most ESOPs if a person has a vested balance there is good chance it is in the hundreds if not thousands of dollars range.  

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