Is $1,000 Automatic Distribution Threshhold a Protected Benefit?

[kgr12]

Back in '05, a 401(k) plan adopted its 401(a)(31)(B) automatic distribution amendment to provide that on a pre-retirement termination of employment a benefit of $1,000 or less resulted in immediate distribution and anything above $1,000 could stay in the plan unless the participant elected otherwise. The plan sponsor is now thinking it wants to instead have anything over $1,000 and up to $5,000 paid out to an individual retirement plan if the participant doesn't elect distribution of the account. My question is, wouldn't the ability to remain in the plan with an account above $1,000 be a protected benefit, right or feature under 411(d)(6)? Thanks for your input.

[Everett Moreland]

1.411(d)-4 Q&A-2(b)(v):

"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 section 1.411(a)-11©(3)(ii) for $1,750, 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 section 1.411(a)-11©(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 section 1.411(a)-11©(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 section 1.411(a)-11©(3)(ii)."

[BG5150]

As far as I know, the "limit" is still $5,000. However, any "force-outs" that are not rolled over by the participant must be placed in an IRA for the benefit of that employee if the amount is over $1,000.

You client should be careful what it wishes for.