Can employer make me take my 401(k) account in cash? Over $5,000, but all rollover money.

[Guest cfaz13]

I resigned from a company 4 years ago but kept my 401k there. Today I received a letter and a check for my entire account balance less taxes. I was shocked because I had received no letters or calls that my plan would be cashed out. The letter that came with the check said I had a balance under 5,000 so I could be cashed out - actually my balance was over 5000 but it was all rollover money so they said that was the same thing since I had not contributed to the plan enough money to reach the 5,000 minimum. My question is, is this legal, and can I get the entire balance transferred somewhere else without having all those taxes taken out?

[Guest b2kates]

Short answer,

if the total account was less than $5,000, then plan could "cash" you out without your permission.

If total account was over $5,000 requires your consent to cash out. There is no distinction in determining 5,000 related to roll over and contributed funds.

Based on status if you are over 5000, you could force reissuance and inclussion of withholding and direct transfer to another custodian.

Good luck,

I used to deal with this type of issue at the Bank I formerly worked for.

[Guest nbs]

EGTRRA allowed a plan to disregard rollovers in determining whether an account balance is under or over $5000 for involuntary distributions, so if the plan sponsor elected this option...yes, your plan can cash you out without your permission.

[Appleby]

This is legal.

The law allows the plan to cash-out your balance if it is $5,000 or less. The law does not require rollover amounts to be taken into consideration to determine the $5,000 limit.

You may rollover the amount to an IRA or other eligible retirement plan. To rollover the full amount, you will need to make up the amount they withheld as taxes out of your other assets (out of pocket). Alternatively, you may rollover only the amount you received. You would then need to treat the amount withheld (as taxes) as income for this year. If you are under age 59 ½, you will also owe a 10 percent excise tax, unless you meet an exception to this excise tax.

[Guest Pensions in Paradise]

Rollover amounts CAN be disregarded in determining whether your balance is over/under the $5,000 threshold. IRC 411(a)(11)(D). So if your entire account consisted of rollover money, the plan could involuntarily cash you out.

HOWEVER, if your account qualifies as an eligible rollover distribution, the plan is still required to provide you with a rollover notice. IRC 402(f).

You should contact the plan sponsor and request a copy of the rollover notice that was supposed to have been provided to you. Unfortunately, the penalty for not providing the notice is small, so even if they did not provide the notice you don't have many options.

If you would like to rollover your entire account, including the amount that was withheld, you can do so. The rollover would consist of the distribution check you received plus your own out-of-pocket money (to make up for the 20% which was withheld). Then when you file your 2003 tax return, you can claim a refund of the 20% that was withheld.

[Harwood]

Legally, you must have been given the "Special Tax Notice Regarding Plan Payments" before you were cashed out. Legally, you must have been given the right to rollover the money; if you did not respond, then you can be cashed out with the 20% withholding.

[R. Butler]

I agree with Harwood. See §1.402(f)-1, Q&A2.

Q-2: When must the plan administrator provide the section 402(f)

notice to a distributee?

A-2: The plan administrator must provide the section 402(f) notice

to a distributee at a time that satisfies either paragraph (a) or (b) of

this Q&A-2.

(a) This paragraph (a) is satisfied if the plan administrator

provides a distributee with the section 402(f) notice no less than 30

days and no more than 90 days before the date of a distribution....

[rcline46]

I would think the 'force out' rules trump the rollover notice rules. If you can force out amounts under $5,000 why would you have to give any notice?

Note I agree it is 'nice' to give notice, but I do not think it is required.

[Harwood]

The government encourages people to keep their money in tax-deferred accounts so that they have money when they retire. It is contrary to established social policy to allow a force-out of several thousand dollars without the opportunity to roll it over.

The rollover notice must be given to all who have more than $200 in their account. § 1.401(a)(31)-1, "Requirement to offer direct rollover of eligible rollover distributions," especially Q&A 11 which has the under $200 exception

[rcline46]

I went back and re-read 401(a)(31) and 411(a)(11). Since the under $5,000 may be distributed 'without consent' I just don't see how 402(f) comes into play to give a rollover notice.

If you go on to read the new a31, after the new regs are out, the trustee must notify the participant of where the money went on force outs between 1,000 and 5,000. This (to me) cements the idea that a rollover notice just is not required.

I don't find the fact that the IRS has not specifically stated this at all a problem. I think they think it is obvious because it is a force out.

[QDROphile]

The distribution without consent relates to an entirely different rule. There is nothing incompatible with requiring a notice and opportuity to rollover directly even if a participant is forced out, and it happens to be the law that notice and direct rollover is required.

I think the new (but as yet ineffective) rule about distributions between $1000 and $5000 supports the position that you don't omit small distributions from the rollover rules.

[g8r]

As pointed out, the notice rules still apply. The cash-out rule just provides that you can cash the person out without consent. The notice requirement gives the person 30 days to decide what to do with the cash-out distribution. Thus, after the 30 day period, if the person doesn't respond, then the plan can either cash the person out (and take out applicable withholding) or rollover the amount to an IRA (which eventually is what EGTRRA will require for amounts over $1,000).

[Tom Poje]

see also discussion in ERISA Outline Book. (6.154-155, 2003 edition)

The only exception, as noted above is if the amount is less than $200.

penalty is $100 for failure to provide notice see IRC 6652(i), which cites 402(f)

[Guest cfaz13]

As the person who started this post, My plan is to rollover the 401k to an IRA (what choice do I have?) but I just want to say that I am not in a position to make up that 20% withholding with my own funds - we are talking over 9,000 dollars - is there any way to get that 20% back? I am outraged because this is alot of money I am talking about that they took out in taxes and it was all done without my consent.

[Belgarath]

I'm not aware of any way you can get this back, but maybe someone else knows a way it can be done. I don't want to cause your blood pressure to rise further, but the amount of the withholding that you don't make up as a rollover is not only considerad a taxable distribution, but will be a premature distribution subject to a 10% penalty tax if you don't satisfy one of the exceptions. Hopefully you do! Good luck.

[Harwood]

Although there was a distributable event, your distribution was unauthorized.

Have you talked to the Plan Administrator about returning the check and instituting a direct rollover? Are you "armed" with the phone numbers of the nearest IRS and DOL offices?

[Guest nbs]

Have you talked to your former employer? Did they have your current address or did they possibly send paperwork to your old address? If they have your current address, but didn't send you distribution paperwork, you may want to make them aware of the notice requirements discussed in this thread. They may be willing to re-issue your distribution if you haven't cashed the check yet. Although, if they've deposited the withholding...maybe not. Good luck!

[Guest jashendo]

It is possible for you to "recover" the withheld tax amount. Since, even if already deposited, the withhoding was recent (you said you just received the check), the plan administrator can adjust its withholding deposits between now and the end of the year, and take care of the reporting on its 945, which is an annual return (unlike an employer's quarterly 941). The catch is that, if the plan's other withholdings between now and year-end are not sufficient to "make up" for your over-withholding, the plan administrator will have a problem, and may not wish to be terribly cooperative.

Are the plan's distributions/withholding handled by a professional trustee or a reputable TPA, or are they actually handled by, e.g., the employer? If the employer, is your relationship such that you might expect cooperation? I can't hurt to ask, especially since the original screw-up seems to have been the employer's. And even though the withheld tax is your money, and you can take credit on your 1040, you will still suffer "damages" to the extent of either the 10% penalty or the cost of coming up with the $9000 to complete the rollover.

If you don't get anywhere with the administrator, do call the IRS.

[Guest cfaz13]

I still have the check in my possession. I did not deposit it. I called the administrator of the plan, Prudential, and was told by one person that I could simply return the check and they would issue a new one with the withholding amount put back in. However another person at Prudential told me they weren't sure if I could get the withholding back. Meanwhile, my former employer is not returning my calls. I did move after I left the company in 1999 and they may have tried to notify me, but Prudential always had my current address so they could easily have gotten it from Prudential. QUestion is, can I trust what Prudential tells me verbally since I get different responses from different people? WHat if I return the check and they send me another one with the withholding still taken out? Prudential may not be too interested in being too helpful because the company I used to work for is transferring all its 401k accounts to Fidelity.

[david rigby]

Act fast and get it in writing. All your correspondence with former employer should also be in writing. Use return receipt mail if necessary.

[Brian Gallagher]

Just a thought on rolling over just the amount you received:

I'm guessing the check was for about $36k ($45k X .2 = 9K)

You would rollover $36k, have $9k in includable income, with $9k of that withheld aready. If you are in the 35% tax bracket, your tax burden is $3150 which gives you a net refund of $5850.

Not the idea situation, but that is how it would generally work out.

[Brian Gallagher]

Prudential probably accept the check back and re-process the distribution according to your instructions. They do it all the time. (not every time, but most times)

[ljr]

You are at the mercy of the institution that made the distribution so suggest you contact them ASAP and NOT negotiate the check they sent you. They can reverse the transaction and issue a new check to the IRA rollover institution of your choice. Whether they will depends upon how cooperative they are. What happens then is that the $9,000 they withheld from your funds is a credit toward their institution's other retirement plan withholdings for 2003. That's why it's important to get to them right away. Once you cross into tax year 2004 this can't be done.