Help me understand Corbel's document regarding distributions...

[Guest DIGMYDOG]

What do you do when you have a 401(k) plan and a terminated participant with less than $5,000...

You send out the necessary distribution election forms (balance over $200), but you never get a response even after sending another term packet certified mail.

I see that in section 6.9 it talks about this, but does it only apply to those participants who have reached normal retirement age...here's what it says:

In the event that all, or any portion of the distribution payable to a participant or beneficiary hereunder shall at the later of the participant's attainment of age 62 or normal retirement age, remain unpaid soley by reason of the inability of the administrator , after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such participant , the amount so distributable shall be treated as a forfeiture pursuant to the plan. Notwithstanding the foregoing, if the value of a participant's vested benefit does not exceed $5,000, then the amount distributable may be treated as a forfeiture...

This paragraph goes on to say that for terminating plans, the portion of the distributable amount that is an eligible rollover distribution may be paid directly to an individual retirement account described in code section 408(a)....

Okay, here are my questions:

1) does this paragraph only apply to those terminated participants who have either attained age 62 or normal retirement age? Or do you apply this to those that are terminated participants under normal retirement age or 62.

2) What do you do if you have someone that is not at retirement age, who has a benefit over $200, but under $5000 that has not responded to the distribution election forms. Do you just pay them out anyway? Or use the above paragraph to deal with it (apply to forfeitures).

3) When the doc talks about benefits under $5000 and how the administrator needs to pay the benefit in a single lump sum without regard to the participant's consent (section 6.4(a),4th paragraph). does this mean that you just cut a check? Or do you still need to get their election on whether or not they want it in cash or a direct rollover. In other words... if your benefit is under $5000, you cannot leave it in the plan. The administrator still needs to receive an election from the participant as to whether they want it in cash or direct rollover.

I thought the cash out rule meant that under $5000 the participant has no election to keep the money in the plan until a later date. They must take a distribution. They still need to elect a cash payment or direct rollover.

Any help on this matter would be appreciated...

Thanks

[R. Butler]

6.9 applies to lost participants. Is the participant lost? If not, 6.4 is the correct section. Assuming the plan sponsor elected in the Adoption Agreement participants with balances under $5,000 can be forced out. Under Treas. Reg. §1.402(f)-1, Q&A2 all participants must be provided with a Special Tax Notice at least 30 days, but not more than 90 days prior to receiving a distribution. In other words you have to give the participant an opportunity to elect a direct rollover. If after 30 days the participant does not respond plan sponsor can force them out.

If the participant is lost you use 6.9. If the balance is under $5,000 it can be forfeited only after making a reasonable effort to locate the lost participant.

Hope this helps.

[Guest DIGMYDOG]

thanks for your reply..

Right, I realize that section 6.9 is referring to lost participants, but does it only cover those participants who are at NRA or A62 as it states in the very first part or the paragraph.

Where it says "Notwithstanding the foregoing , if the value of a participan't vested benefit...does not exceed $5000, then the amount distributable may be treated as a forfeiture.." Is this still pertaining to those lost participants at NRA or A62 with balances under $5000, or does it pertain to all lost participants.

Regarding section 6.4:

so if you have someone that is not lost, has a balance under $5,000 (over $200), you provide the dist. forms and after 30 days you do not get a response. You force them out by cutting them a check? If you haven't heard from them, how do you know that they are not a lost participant at that point. Shouldn't you resend the dist form certified, then if you still do not get a response, you treat them as a lost participant and forfeit their benefit as stated in the lost participant section of the doc. How do you know you're not sending a check to a bad address?

So "force out" means actually paying the money out in cash (check). It does not mean that because they have under $5000 they do not get to leave the money in the plan until a later date (NRA or A62 or whatever the doc says). You still need to provide the election forms, but if they do not respond you just pay them out in cash.

It's only when you have a lost participant that you treat their their benefit as a forfeiture. If the plan is terminating, then you pay their eligible rollover amount into an ira code Section 408(a) or 408(b).

Right?

I am just having the toughest time getting all this straight...thanks for your patience and your help...

When you say "force them out". do you mean just cut a check with fed and state withheld? Where in the doc does it specify this?

Also, the section where it talks about a lost participant is not just referring to those at normal retirement age or age 62, it is referring to all lost participants? It's confusing because the first part of the paragraph specifies those at NRA or A62.

[R. Butler]

Regarding 6.9

As I read it the key words are "Notwithstanding the foregoing..." The general rule of 6.9 is that you wait until the later of age 62 or NRA, however, if the balance is under $5,000 you don't have to wait that long.

Regarding 6.4

I would send the intial forms out Certified w/ Return Receipt. That way you know whether or not the forms were received. If they receive them & don't respond, after 30 days distribute the money to them. If it turns out you don't have a current address, make a diligent effort to find him. If after that diligent effort you can't locate them, then the document says you can forfeit.

I regards to distributions after plan termination I read 6.9 the same way you do, but in reality I don't know who will accept the signature without the participant's signature.

[Guest DIGMYDOG]

can you point out where in the doc it specifically says to pay them in cash after the 30 day period.

We're having a little difference of opinion here, and I would love to reference this in the doc.

Thanks

[Guest DIGMYDOG]

Okay, here's another question:

How do you forfeit a lost participant's 401(k) deferral money when there is no provision as to how to allocate forfeitures of deferral money?

Also, how do you get a financial institution to release a person's 401(k) deferral benefit who hasn't responded to your dist form whithout their signature?

Any suggestions?

[ljr]

We are a bank trust department and use the Corbel documents.

As to rolling to an IRA, you are correct in that what financial institution would take the money without the participant's signature on their IRA forms. Banks are required to know their customers and have very stringent procedures we have to follow based on the American Patriot Act.

The Corbel document has a specific section that discusses what to do with plans that have no election in the adoption agreement regarding forfeitures - such as a 100% deferral 401(k). See 4.3(e) which states: ". . . . If no election is made in the adoption agreement, any remaining Forfeitures will be used to reduce any future employer contributions under the plan. . . . "

Note that money due a lost participant and forfeited must be restored should the person show up and request it. I've never heard of it happening but always warn employers they will have to make a contribution to cover the distribution should the plan lack sufficient forfeitures to cover it.

[ljr]

Digmydog - as to how to get the financial institution to forfeit, we do it upon the Plan Administrators request. It goes to a "participant" account called "forfeitures" and is handled at the end of each plan year.

Or did I not understand your question?

[R. Butler]

can you point out where in the doc it specifically says to pay them in cash after the 30 day period.

I don't know if the 30 day time frame is explicitly stated in the document. §6.4 provides that you can force them out. As mentioned above Treas. Reg. §1.402(f)-1, Q&A2 requires all participants must be provided with a Special Tax Notice at least 30 days, but not more than 90 days prior to receiving a distribution.

How do you forfeit a lost participant's 401(k) deferral money when there is no provision as to how to allocate forfeitures of deferral money?

I would treat it the same as I do a profit sharing forfeiture. The adoption agreement has 2 questions reagrding forfeitures. The first states "AND, EXCEPT as otherwise provided below with respect to Forfeitures attributable to matching contributions..." I interpret that to mean that all forfeitures except for match forfeitures are dealt with under that question.

Also, how do you get a financial institution to release a person's 401(k) deferral benefit who hasn't responded to your dist form whithout their signature?

Most financial institutions release a check at the request of the Plan Sponsor.