Increasing Involuntary Distribution Threshold

[Guest Judy S]

I have a new client that was using a prototype plan from another firm for its integrated DB plan and its 401(k) plan. That firm adopted an amendment for all its prototypes, DB and DC, in 2005 to reduce the involuntary distribution threshold to $1,000. We are now restating their plans and now that they are aware of what happened to their plans in 2005, they would like to change the threshold back to $5,000.

As I read the 411(d)(6) regs, it looks like they can only do this prospectively for benefits accruing after the amendment is adopted or effective. Reducing or eliminating the threshold is OK, but increasing it is not. (1.411(d)-4 A-2(b)(2) Ex 3(v))

Before I rewrite the plan, I'd like to hear from others on whether you think I'm correct or not.

[JanetM]

The rules that went into effect 3/28/05 state is you can do involuntary cashout between $1,000 and $5000 only if you roll the funds to IRA. You can always do voluntary cashout with the participants consent of any amount.

[Guest Judy S]

If the plan raises the involuntary cash out threshold from $1000 to $5000, they will roll account balances between $1000 and $5000 to an IRA absent a participant's election. My question is can they raise the threshold to $5000 across the board for all account balances in the plan, or can they only raise it for account balances accruing after the effective/adoption date of the amendment? Before the amendment, participants with account balances between $1000 and $5000 have the option of leaving their money in the plan. After the amendment, those participants will no longer have that option; if they don't elect to take their money, it will be rolled to an IRA. Is this considered a 411(d)(6) cutback?

[Guest Judy S]

I'm wondering why there are no replies. Did I not provide enough information? Is this a no brainer and not worth a reply, or too complex, or something else? Anyone?

[JanetM]

It is my understanding that the change would apply to all balances regardless of when accrued.

[Bob R]

Not sure if it's a no-brainer or a trick question. I may be missing the issue, but below is text from 1.411(d)-4 and it seems obvious (to me) that you can increase the threshold. One way to view it - you agree that the threshold can be reduced. If you reduce it to $0, then the very first sentence of the reg would permit you to add the involuntary distribution provision with a threshold of $5,000.

It's an exception to the anti-cutback rules meaning it can be applied to all amounts regardless of when accrued.

v) Involuntary distributions. A plan may be amended to provide for

the involuntary distribution of an employee's benefit to the extent such

involuntary distribution is permitted under sections 411(a)(11) and

417(e). Thus, for example, an involuntary distribution provision may be

amended to require that an employee who terminates from employment with

the employer receive a single sum distribution in the event that the

present value of the employee's benefit is not more than $3,500, by

substituting the cash-out limit in effect under Sec. 1.411(a)-

11T©(3)(ii) for $3,500, without violating section 411(d)(6). In

addition, for example, the employer may amend the plan to reduce the

involuntary distribution threshold from the cash-out limit in effect

under Sec. 1.411(a)-11T©(3)(ii) to any lower amount and to eliminate

the involuntary single sum option for employees with benefits between

the cash-out limit in effect under Sec. 1.411(a)-11T©(3)(ii) and such

lower amount without violating section 411(d)(6). This rule does not

permit a plan provision permitting employer discretion with respect to

optional forms of benefit for employees the present value of whose

benefit is less than the cash-out limit in effect under Sec. 1.411(a)-

11T©(3)(ii).

[Guest Judy S]

Thanks Bob R - I wasn't seeing the up aspect of the reg-only the down.