Cash-out distributions

[katieinny]

I have a client who would like to take advantage of the cash-out feature in his retirement plan and distribute some small balances to several participants. He will be sending a letter telling the participants that they have 45 days to respond or a check will be sent, minus the 20% withholding. He will include the Special Tax Notice and distribution paperwork with his letter.

Does anyone have a sample letter that you would be willing to share?

[Guest b2kates]

Silly question, but are these all terminated participants?

[katieinny]

Yes, this only pertains to terminated employees who, for whatever reason, did not request a distribution when they terminated employment.

[Guest b2kates]

if the amount is less than the 5000 limit, the plan may just issue a cash out.

Yes it would make good practice to send a notice to the participants advising them and giving them the chance to elect a direct transfer.

[david rigby]

There may be another issue. Many plans require distribution if the balance is below $5000, although perhaps after a waiting period.

The admonition about sending "...a notice to the participants advising them and giving them the chance to elect a direct transfer" is probably not strong enough. If the plan administrator plans to send them a check, then tax is withholding is required, and the participant must be given an opportunity to elect a direct rollover to avoid the withholding.