Under $5k distributions

[Guest benefitsanalyst]

We have had several employees recently who have received lump-sum distributions due to their account being under $5,000. Our recordkeeper sends terminated employees a letter when they leave the company telling them what their options are and if they do NOT respond within 90 days, their account will be distributed to them if the value is under 5k.

These employees are now stating that they never received the letter and they would like the check reissued as a rollover. Our recordkeeper has confirmed if every case a letter was sent out and since the employee did not respond, their account was distributed. As the plan administrator, what are our options? Does it cause any plan qualification issues if we reissue the check? Our recordkeeper is stating that this is an irrevocable election and it could cause qualification issues.

[AndyH]

First, I question whether the recordkeeper has the authority to do what it does under the terms of the plan document. What exactly does the document say about cashouts? It would seem that prudence would at least require a certified letter.

[jaemmons]

Keep in mind that EGTRRA Section 657(a) requires that account balances greater than $1,000 but less than $5,000 be directly rolled over to an IRA.

[KJohnson]

jaemmons--I thought that regs had to be issued before that provision of EGTRRA was effective.

[Guest benefitsanalyst]

There is a provision in EGTRRA for accounts that are immediately

distributable that do not exceed $5,000 but are over $1,000. For those immediately distributable accounts in the $1,000 - $5,000 range, plans must roll the balance over to an individual retirement plan unless the distributee elects to receive the distribution directly or to roll it over to another account.

Note that this provision is not effective until final regulations are issued by the Department of Labor providing for fiduciary "safe harbors." Since the deadline for publishing these guidelines is 6/7/04, it will probably still be awhile before any action can be taken.

[jaemmons]

KJohnson, thank you for the clarification. I just wanted to bring this to light for future application.

Getting back to the issue at hand...I agree with Andy H. My office sends ALL distribution paperwork certified in order to eliminate these potential conflicts. The problem is that the plan administrator must demonstrate that the former employees were notified of their benefits and the possibility of involuntary cashout for lack of response by a prescribed date. How did the employees know a check was being sent if they did not receive the letter from the recordkeeper??

[Guest benefitsanalyst]

From my understanding, EGTRRA states that participants whose vested defined contribution account balances are $5,000 or less may be cashed out WITHOUT their consent. However, does this mean without giving proper notice?

[AndyH]

Absolutely not. They also need to be given the direct rollover or cash option.

These provisions would be available after the normal distribution procedures, including notices, have been followed.

[jaemmons]

benefitsanalyst-Yes, the plan admin can involuntarily cash out the participant without their consent, but they must do so only after they have provided the participant with proper notice that they have benefits due to them under the plan. They can't arbitrarily just send out a check if they haven't notified the participant of their distribution options.

[R. Butler]

Even if balances are under $5,000, the §402(f) Notice must be given prior to the distribution. The Notice should be given at least 30 days prior to forcing the distribution.

Also, I don't see the qualification issues if the checks are reissued. If the participants lost the checks we would certainly reissue. Assuming the participants have not cashed the checks, how is this all that different?

[Guest benefitsanalyst]

Our adminstrator is stating that if a distribution is simply reversed, the account will be subject to the ups and downs of the market since the distribution. If the account has gone

up, we will need to make up the difference. If his account has gone down, he will lose money. They are also stating that the other option is to send a Rollover out of the Plan form with instructions to reissue the check.

Any thoughts on this?

[R. Butler]

Your last post seems correct. We've had to request that checks be reissued for other reasons. The investment company usually reinvests as of the distribution date. The Plan Adm. is generally responsible for any gains that would have accrued.

Going back to one AndyH's posts, who gave the recordkeeper authority to do this? The recordkeepers with whom we work cannot distribute without authorization. I have seen recordkeepers send out requests to the Plan Administrator for a blanket authorization to distribute all balances under $5,000 upon termination of employment. We reccommend that Plan Administator not give the recordkeeper that authority. I would find out where they are getting their authority to distribute.

[Guest death and taxes]

I don't understand why reissuing the check will cause the account to experience gains/losses. If I write a check from my checking account for $x to Joe and then place a stop-payment on it and write a check for $x to Jane, I haven't lost any money. Same principal.

If the issue is how to process it in a daily environment, there might be some manual entries involved but there should not be any investment experience.

The payor will have to recover the withheld taxes which could be an issue. We typically "front" the money from our daily tax deposit and adjust the liability for 945 reporting.

[Guest Benz]

I agree - that you can re-issue the check without any concerns - we have done it several times. We allow a participant 60 days to return the forms - if they do not return we will cut the check - however, if they receive the check and then decide they want to roll it over we simply re-deposit the check and re-issue as a rollover - we have never accounted for investment changes as it's a simple in and out transaction - we have done this several times and the auditors have agreed with our process.

[Jean]

I also agree that a pure "reissue" should not have a gain / loss.

This is different from a "reinvest" which would probably happen because the TPA acted contrary to how instructed. Then there may be a question of lost funds.

I believe that the TPA has authority to send distribution notices and / or process the distribution if instructed by the Plan Sponsor. This could be part of the service agreement. Any recordkeeping system should be able to track when the distribution notice and forms were sent to the participant. If US mail, there is no way of knowing if the items were recieved. A second notice mailing is cheaper than reissuing the check.

I think the key is having a well documented procedure and policy that is consistently used. If no response is received to the first mailing after a resonable time frame (30 - 60 days), I would recommend a second mailing that is designated as a "second and final notice." If that notice is not responded to within 30 days, I would recommend a final notice stating that a check will be issued to the participant, or to an IRA if that is what the plan options are, within 2 weeks. If the participant receives the check and demands that it be reissued, I think you have a better argument not to as multiple notices were sent.

It is possible that the GUST document you are using has a yes / no option that balances between $1-$5K will be rolled to an IRA.

[AndyH]

I agree with some of that. Again, it depends upon what the document and trust agreement say.

The document must contain authority for an involuntary distribution with money withheld.

And of course US mail can confirm receipt. It's called certified mail.

Also, a sponsor cannot willy nilly discharge distribution responsibility to a TPA without breaching fiduciary responsibility! That is the Trustee's role. Seems to me that the document and fiduciary rules are being taken a little lightly here.

[actuarysmith]

I agree with these threads - and disagree with your recordkeeper. How in the world does supposedly not responding to a letter that may have never been received an "irrevocable election"?

In the future, these letters should always be sent certified mail.

Second, what does your document say? The document must state that balances under $5,000 will be cashed out. The "may" language is no longer allowable.

If the recordkeeper cannot prove the letter was received, and if your document says that balances will be cashed out - AND the participant claims they want to roll over the funds, then I would have the first check voided, and re-issue.

With all of that out of the way - I have hunch what really happened (because I see it all the time). The letter probably was mailed out, the participant ignored it or failed to take action. Then when the check finally arrived (minus) withholding, they panicked and claimed they never recieved it.

Without proof of delivery, I don't see that you have any choice but to re-issue.

If your recordkeeper absolutely refuses, the participant can still roll the proceeds within 60 days. They could choose to make up the amount taken out for withholding out of personal funds. (They would get it back later as a tax refund when filing the 1040 return)