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I have been asked by a prospective client how the $5,000 force out limit applies to a terminated participant who will receive an additional allocation that will bring the balance over $5,000. For example, assume the participant terminates employment July 9 with a balance of $4,750. But the plan makes a profit sharing contribution after the end of the plan year. The participant will receive an additional $600 at that point, which would bring the account balance to $5,350 (assuming no change in the investment balances). Knowing that many record keepers automate this process and would process the distribution before the end of the year with no way to anticipate a contribution receivable, I'm curious what the potential liability to the plan sponsor might be, if any. Does the answer change if the termination or distribution occurs after the end of the plan year? Or if it is a required contribution, such as a safe harbor other fixed contribution?
