Direct Rollovers and Involuntary Cashouts

[could be me maybe not]

Distribution 101 question: Assuming no state withholding is required, can a plan send a check representing 80% of a lump sum amount without offering a direct rollover option if the full benefit value is between $201 and $4,999 and the plan does not require the consent of the participant or spouse for such distribution, or MUST the plan offer t make a direct rollover and provide for a reasonable time for the participant to choose whether or not he/she prefers a direct rollover?.

[Everett Moreland]

The plan must send the special tax notice, offer a direct rollover, give the participant at 30 days to consider whether to elect a direct rollover, and comply with the automatic rollover rules (if applicable) and all the other rules associated with eligible rollover distributions.

[could be me maybe not]

Thank you, Everett.

Are there any dissenting opinions out there, or are they all in my office!!??

[QDROphile]

Fire everyone in your office who persists in arguing a position that they cannot support with credible authority. Mistakes to some degree are tolerable, but standing on ignorance is not, despite its pervasiveness in our country.

By the way, the "reasonable time" is at least 30 days.

[No Name]

Follow up question. It is common that, when a participant terminates, we generate a form for the terminee to complete asking how they want their money. We also include the IRS Notice.

Sometimes, these don't come back for months (or years), so we carry these people on the books.

Language in the plans read that the employer CAN cash out the participant, but is silent on whether they MUST, and no "drop-dead" date is mentioned.

Under the new rules, is there a date specified as to when an employer MUST make the direct rollover?

[Alf]

I understand that employer discretion as to the timing of distributions is prohibited, but that tons of documents have discretionary provisions for cash outs. I don't believe it is permitted, so I would say that under the new rules the plan should indicate when cashouts are going to be made and administer the plan accordingly. There is no limit specified in the new rules, the cashout rules are discretionary, so anything goes (except total employer discreation imo).

[KJohnson]

No discretion is allowed. There is a kind of a drop dead date. If you don't cash out by the end of the second plan year following the plan year of termnation of employment you cannot forfeit until there have been five one year breaks.

[QDROphile]

Where does that come from?

[Belgarath]

1.411(a)-7(d)(4)(vi). So if the distribution is made after the close of the second plan year following the plan year of termination of employment, it isn't "on account of" temination of employment, and the 5 year rule KJohnson mentions kicks in.

[401 Chaos]

So, if a plan--in an attempt to beat the mandatory IRA rollover requirements effective March 31, 2005--cleaned house and made involuntary cashouts to all former participants with accounts under $5,000 in early 2005 (including folks who had their small accounts in the plan for more than two years following termination) the plan would be in violation and a participant would have a right (or be required) to return the cashout?