Participant force out

[Guest jhilliard]

Does anyone have a sample force out package (or letter) available? I have a client who wants to clean up their plan (PSP) by eliminating all terminated participants. We all know we can't force out anyone with a $5K balance or higher (without rollover) but we have been asked to draft a letter to ALL terminated employees to try and encourage withdrawal. I am struggling with this and thought I would solicit input.

Any ideas?

[E as in ERISA]

Instead of encouraging them to leave the plan, why don't you encourage them to go to a rollover? Lots of IRA providers have very attractive envelope stuffers. The breadth of investment options available in an IRA can be very attractive (unless you already allow self-directed brokerage accounts -- those can eliminate some of the incentives for moving to an IRA). For those participants who simply don't know how to go about doing a rollover, the IRA materials would provide them some of the necessary information. There may be others who are concerned about fees for an IRA, and the materials would answer some of those questions. Others may just be waiting for a complete turnaround in the market before they sell.

NOTE: Check your plans with legal counsel before you do anything, because there can be implications of "recommending" a provider.

[mbozek]

Why does the client want to force the participants out? Once they are out their assets will not share in plan expenses. If the participant does not claim the benefit by the time its payble it can be forfeited to the plan.

[Harwood]

Why do some clients want to force people with under $5,000 out?

1. Because the plan document says to, with no discretion on the sponsor's part as to timing.

2. Because Sponsor pays fees [based on number of balances] and picks up other expenses for the benefit of Participants. Sponsor doesn't want to continue to spend money on terminees, especially those with small balances

[ljr]

Would suggest you send those participants distribution forms with the cover letter suggesting they complete them and direct the funds to an IRA. Katherine makes a good point in the riks of the employer recommending any IRA rollover company.

Then tell them if they don't respond by a certain date, the funds will be paid directly to them, less 20% withholding and emphasize they are taxable, possibly plus the 10% penalty for early withdrawal.

This usually gets a good number of participants to respond. Those who don't have been given the opportunity and just get their checks. Then you hope they cash them!

[R. Butler]

If the participant does not claim the benefit by the time its payble it can be forfeited to the plan.

I'm leary of forfeiting vested benefits. I know that in certain circumstances that it is permissable, but that is a last resort. You still have to make reasonable efforts to make the distribution first. It seems to me that at a minimum, reasonable includes providing a distribution packet.

[Guest mariecummiskey]

has anyone done a force out if the plan doc. doesn't require distribution until retirement? we have clients who would like to do so, but have held them back.

if distrib package provides no response, do you send check net withholding? what about state withholding?? do you send the fed withholding immediately, or wait until the distribution check clears?

we are also leary of forfeiting.

has anyone done 100% withholding?

[ljr]

Mariec - check the plan document. Right now we don't have any plans that require a participant to wait until retirement age for a distribution. Since you do, an alternative is to change to a more liberal payout timing. To force out the plan has to allow it. If you do a force out check, it's net of withholding and we send the withholding in right away. There is no requirement for state withholding and we don't do it. We have not done the 100% withholding but may do it for small (say under $100) amounts where a plan has terminated and the employer no longer exists. As to forfeiting after a reasonable effort to distribute, the plan has to provide for this and plans that do so must also include a provision that if the employee later appears and wants their money the plan has to pay it. Usually the money comes from forfeitures in the plan, and if there are not enough, the employer is required to make a contribution - whether deductible or not - to cover the distribution. So far, I've never heard of a single "lost participant" reappearing. There is a whole series of threads on lost participants and the bottom line is there is no good solution - yet. At a recent ASPA meeting one of the speakers said the IRS/DOL is planning to address this problem.

[david rigby]

There is no requirement for state withholding and we don't do it.

What is the basis for this claim?

Several states have voluntary withholding (that is, at the election of the recipient). A few states have mandatory withholding.

[mbozek]

While the plan may be able to claim an exemption from withholding state income taxes, the participant will be responsible for paying estimated state taxes to avoid a penalty for underwithholding.

[david rigby]

Some states specifically require withholding on lump sums. To what exemption do you refer?

[ljr]

Sorry! Should have clarified that my state does not require mandatory withholding from distributions. Mbozek, can you tell us more about plans claiming exemption from state withholding taxes - I'm curious! What states currently require withholding?

[R. Butler]

According to the little chart I have Delaware, Iowa, Kansas, Maine, Massachusetts, Oklahoma & Vermont have mandatory withholding rules.

In California, Georgia, North Carolina, Oregon & Virginia withholding is required, but the participant may elect out.

Some of these states only require tax withholding if the distribution is over a specified amount. You should be able to find the precise requirements by checking the State Dept. of Revenue websites.

[david rigby]

It is my understanding that NC and VA both have 4% mandatory withholding.

[mbozek]

ERISA preempts the application of state tax laws which aply to the plan. Therefore the plan could refuse to withhold state income taxes but the participant would be liable for estimated taxes.

[R. Butler]

It is my understanding that NC and VA both have 4% mandatory withholding.

I double checked these 2 states on their websites. NC is 4%; it is mandatory, but participant can elect out (See Form NC-4P). Viriginia is also 4%, it is mandatory & participant can only elect out in limited circumstances (See Form VA-4P).

[MGB]

Although it is always dangerous to disagree with a lawyer on a legal subject, here goes. ERISA preemption should not apply to the withholding of state taxes. This is an issue of individual taxation, it is not an effect on the plan or the benefits it provides.

[Guest mikeak]

mbozek - I take your statement to mean if the plan includes specific language about withholding it can control that issue but if it is silent state rules apply?

I think the biggest issue in these situations is probably the inconsistent application of state requirements by TPA's/Trust Administrators.

A useful site is: http://www.taxadmin.org/