cashout of distribution less than $200

[AKconsult]

Seems like I should know this but I'm not sure. If a participant terminates with less than $200, since there is no mandatory withholding necessary, would it be permissible for the plan to cash him out by just mailing him a check without giving him any options or must he receive a distribution form and special tax notice first?

[Everett Moreland]

It depends on what the plan states. A plan is not required to offer distribution options in this situation but must give the special tax notice.

[GMK]

Mr. Moreland is correct.

The Plan document may not even allow participants the option of a rollover for a distribution under $200. But if it does, then I'd send the distribution form.

In all cases, send the special tax notice. You can explain in the cover letter that the Plan does not permit rollovers for distributions under $X (if that is true) and that no withholding is required on distributions under $200.

[J Simmons]

Without election by the former EE for no or different tax withholding (Form W-4P or substitute), wouldn't 10% be required by default?

[GMK]

Interesting point, J Simmons.

If the <$200 qualifies as an eligible rollover distribution but is paid to the participant, then the 1099 instructions apply: "You are not required to withhold 20% of an eligible rollover distribution that, when aggregated with other eligible rollover distributions made to one person during the year, is less than $200."

No problem if the participant elects to receive a cash payment.

Also no problem if the amount still qualifies as an eligible rollover distribution even if a plan provision prevents the participant from choosing a rollover (because the amount is less than $200). But is it an eligible rollover distribution if you can't choose to roll it over? Has the IRS ever commented on this?

Probably a good reason to send the distribution form with the special tax notice.

[GMK]

The amount is still an eligible rollover distribution (unless it wasn't for some reason other than being less than $200), because the participant can rollover the amoumt by putting the money into another qualified plan or IRA within 60 days. It doesn't matter that the Plan won't process the rollover for the participant. So, no withholding.

...or am I missing something?

[J Simmons]

GMK,

You are correct. IRS Temp Reg § 35.3405-1T, Q&A F-6.