Can a compnay cash out a 401(k) with unfinished paperwork?

[Guest Michael Anderson]

We have a client who filled out distribution paperwork from her old 401(k) plan and planned to roll it over. She marked Total Distribution signed and dated it. She did not mark cash out, rollover etc.- nothing else. They sent her a check with the 20% withholding taken out - basically they cashed out her account. She had $21,000 in the account. At the bottom of the distribution sheet there is a disclaimer that states 'Any portion of your request which you do not designate as a direct rollover will automatically be paid directly to you, subject to any applicable taxes and penalties.' She did not want to cash out and did not indicate on the sheet that she did - but she also did not indicate that she did not. Do we have a leg to stand on here? Can they do that? She would of course like to put the money back and have it redistributed - the check has NOT been cashed. Any Ideas??? Thank you.

[JanetM]

Did she complete the rollover information? ie: name of IRA or Plan? If that section was complete and you just failed to check the "box" it would seem you made the rollever intention clear. (In one of my plans you would have grounds for having the transaction reversed)

If the forms were just signed and sent in with no indication of intent - you are stuck. (At least if the distribution came from one of my plans.)

[Guest Michael Anderson]

There were two sections, 1) What form of payment? and they checked 'lump sum' - 2) Payable to whom - there was nothing marked here at all and no information given.

There was a spot to check Roll to IRA, Roll to Qualified Plan or Cash out made payable to participant. None of these were marked.

So basically the participant stated that they wanted the payment to be made at one time, but they never indicated how they wanted the payment made or to where. Normally this should be cut and dry - the company should not have cashed out the account because the amount was over $5,000 and the participant never authorized the cash distribution - However the company had the disclaimer that I have written above in my original message. My question is can they lawfully do what they did and not have to reverse it?

[Guest DMK]

Mike -- I think that I have to disagree with your statement that your client did not authorize the distribution. She indicated that she wanted a lump sum payment, she signed and dated the form, and she obviously submitted it. Since she failed to indicate that she wanted the payment made to anyone/where other than herself, I think the Plan is on fairly solid ground. The disclaimer that was on the form is just icing on the cake.

[JanetM]

You said the participant marked lump sum, signed and dated the form - then sent it in.

Now - the plan administrator receiveing the form would take the form and process it - given an election has been made and the form signed.

We plan sponsors/administrators really do "ASSUME" participants read what is sent to them.

Now - Seeing how the participant failed to follow instructions and complete the form properly - you assume the plan sponsor/adminisitrator "should not have processed" distribution.

It appears to me the form was valid election - given the wording on the face.

Is it legal? YES! You bet.

[mbozek]

Since the participant did not indicate that the distribution was to be rolled over to an IRA it was permissible fora the PA issue the check. Ask the PA if it will take the check back and allow the part. to elect a rollover properly. I dont see how the part. could expect to have the distribution rolled over if no IRA was designated as the recipient plan.

[Guest Michael Anderson]

Does it make a difference that the participant sent rollover paperwork to the Co. first and this generated the Co. to send out their specific dist. form? Thus they had conflicting and incomplete information - should they not contact the participant? If I had received rollover paperwork, sent out a dist. form and received the form back incomplete without an indication of what they wanted done with the account I would have contacted them. Besides the two questions are completely seperate - whether you want a partial or full distribution has nothing to do with whether or not you want to cash out or roll over the account. I just wonder if the disclaimer is legally binding, because there was never a clear intention to cash out the account. Thanks for your replies!

[MGB]

Rather than going through all of this effort to reverse it, why not just roll it over now? If she can't come up with the extra 4200 to do a complete rollover, she would only need to borrow that somehow until she receives her tax refund of the 4200. Or, just keep the 4200 as a distribution.

[RCK]

I agree with what I see as a concensus of the responders-- the distribution was valid as is. Was it sterling customer service? NO, but that's not the question.

As a plan sponsor, when we receive a rollover form from a terminated participant's broker, brother-in-law, etc., we send it back with our plan's forms. Do we keep track of who has sent us the incorrect forms? Absolutely not.

But then again, one of my personal pet peeves is investment advisors who expect the plan's administrators to make distributions based on the bank/fund/insurer's forms, thereby violating their fiduciary responsibility to provide the participant with a Special Tax Notice in a timely manner.

RCK