involuntary cash out option

[MJ Hartman]

in the past it seemed that our admin. group would tell an employer that if they did not receive a response from a terminated participant that they could cash out the term. part. balance without consent if it was less than $5000. Sometimes the employer would, sometimes they would not. After reading the detail closer in the regs. it appears that electing involuntary cash outs the employer dosen't really have a choice, anyone with less than $5,000 is paid out immediately.

So does this mean anyone with a balance of less than $5000 in a plan with an involuntary cash out provision MUST BE PAID asap , irregardless of plan distribution rules stated in the document, and/ or the possibility that they might be due additional $ from a year end profit share or forfeiture allocation? and dosen't this present more of an administrative burden than the standard distr. rules? I'm hesitating to include this provision in the new docs. being drafted/amended for gust. any comments or thoughts on how others are using this option?

[Guest earthy]

Is this a defined contribution plan or a defined benefit plan?

If the Plan is a defined contribution plan, you must distribute the employee's present value of benefits under the plan at the time of termination. For purposes of " termination", this test can be met as long as the involuntary cash-out occurs no later than the close of the second plan year following the plan year in which the termination occurred. Treas. Reg. 1.411(a)-7(d)(4)(i). In a defined contribution plan the "present value" is simply the vested portion of the participant's account balance on their termination date.

For purposes of forfeiture reallocation, the non-vested portion does not have to be reallocated immediately. Generally, a forfeiture must be reallocated no later than the end of the plan year in which the participant who received the involuntary cash-out incurs five consecutive one year breaks in service. Treas. Reg. 1.411(a)-7(d)(2)(iv).

Remember, the term "cash-out" applies to four basic features and provisional requirements related to a tax-qualified 401(a) (or ERISA covered 403(B) Plan). These are: the amount of the participant's distribution, the applicable participant consent for a plan subject to the QJSA rules, the timing of forfeitures, repayment, and restoration of forfeitures.

I have a 1995 IRS document (Document 6389) that details basic vesting rules and the application of the consent requirements under Code Sections 411 and 417 if you need it.

Hope that helps.

earthy

[Guest dmj1998]

MJ - we've always taken the approach that the distribution was going to happen no matter what. By "immediate", we give 90 days notice of the impending distribution payable directly to the employee. Within the notice, it lets them know that the option to roll over or the option to receive their balance paid directly earlier than 90 days is available to them by calling our service senter. Either way, there was no "opt out" of the distribution.

With regard to profit sharing, I think the plan doc should define eligibilty for separated participants. I can't help you with the forfeitures b/c we have day 1 100% vesting.

[MJ Hartman]

thanks for your replies. it gives me a lot more to work with on amending my current plans and giving the employers the real story on immediate cash outs.