Cash / IRA option in Forced Distributions under $1,000

[JButtrick]

Some IRS approved plans say that the Employer MAY force a distribution if the balance is $5,000 or less. It is apparently not mandatory. This sounds a bit too discretionary to me. I am rather surprised that the "MAY" got through the review.

The question is: Since the distribution itself may be discretionary, if the distribution is $1,000 or less, it is acceptable to make the FORM of that discretionary distribution (Cash or IRA) discretionary as well.

My feeling is that the participant should know in advance the form of the payment if no election is made and the benefit distribution is forced.

However, it seems that not all potential IRA providers have their act together regarding the conditions under which they will accept a forced distribution, especially if it is under $1,000. AND providers may change. The use of a mandatory IRA disbursement assumes that the Employer can find a provider willing to take it. Therefore, it would be nice if the form could be discretionary.

Comments?

[WDIK]

Comments?

I probably would not interpret the plan provision you refer to quite so broadly. It does not seem to me that such discretionary authority would apply to each individual participant, rather the discretion is used to establish a nondiscriminatory policy that is applied fairly and consistently to all "cash-out" situations.

With respect to balances beneath the $1,000 level, the plan document or plan policy should indicate one procedure. I do not think that the "form" of distribution can be arbitrarily selected.

[No Name]

The "MAY" provision is in Datair (IRS approved) documents. I find most small plan sponsors send out termination paperwork and if they receive no reply, do nothing. Just finishing up a plan that had a mass departure of employees in 1996. There are 3 active participants and 19 individual accounts.