Can I force out a terminee

[RayJJohnsonJr]

We're terminating a 401(k), everyone has been paid out except 1 guy with about $2,000 in the plan. We've talked to the guy, sent him election forms on numerous occassions, and had the business owner call him, but he won't budge. The Plan Document does not include provisions for force outs. We want to file a Final 5500 but cannot until we get this huy paid out. What can we do?

Thank You!

[Bill Presson]

This is an answer from rocknrols2 on an earlier thread on the same topic and I'm pretty sure it's still accurate.

"If it a profit-sharing plan without a 401(k) feature, there is an exception to the consent requirement provided that (1) the terminating plan does not offer an annuity option and (2) the plan sponsor orr any other controlled group member does not maintain any other DC plan other than an ESOP. If the answer to both of these is no, then the plan may simply cash out the participant without regard to the amount of his/her account balance. If (2) is yes, the terminating plan may simply transfer the participant's account balance to the other DC plan without the partiicpant's consent. See Reg. Section 1.411(a)-11(e)(1). If (1) is yes, then you could purchase an annuity for the participant and distribute it to him/her.

If the plan is a money purchase plan, there is no similar exception to the cash-out rule. In that case, the only option may be to purchase an annuity for the participant and distribute it to him or her.

If the plan is a 401(k) plan, the rules are pretty much the same as in the case of a profit-sharing plan, but it is important to bear in mind the distribution restrictions on termination of a 401(k) plan. These are that there is no other DC plan is maintained by the plan sponsor or any other entity which is related to the plan sponsor within the meaning of Section 414(b), ©, (m) or (o) at any time during the period beginning 12 months before the date of the plan's termination and ending 12 months after the plan's termination. The following are not considered DC plans for purposes of the special 401(k) distribution restriction on plan termination: an ESOP, a SEP, a SIMPLE IRA, or a 403(b) or 457(b) or (f) plan. "

[masteff]

Prior discussions on same:

http://benefitslink.com/boards/index.php?showtopic=37784

http://benefitslink.com/boards/index.php?showtopic=23914

It appears your answer lies in Reg 1.411(a)-11(e)(1)

[mbozek]

We're terminating a 401(k), everyone has been paid out except 1 guy with about $2,000 in the plan. We've talked to the guy, sent him election forms on numerous occassions, and had the business owner call him, but he won't budge. The Plan Document does not include provisions for force outs. We want to file a Final 5500 but cannot until we get this huy paid out. What can we do?

Thank You!

Why not an involuntary rollover to to an IRA if you can find an IRA provider that will take such a small amount.

Or use reg. 1.411(d)-4 Q-2(b)(vi) to amend the plan to provide for involuntary distribution upon termination of a PS plan that does not have an annuity option. If he doesnt cash the check he will still be taxed b/c he has actual receipt of the fundswhich will encourge him to cash the distribution.

Last option- offer him a bonus if he cashes the distribution check.

Q why wasnt this contingency thought of before plan was terminated?

[RayJJohnsonJr]

I'm not sure what you mean by "plan has an annuity option." Do you mean at NRA the participant can elect a life annuity, or J&S, or 10 year certain annuty? If so, then, yes, the plan does have an annuity option. Also, I don't see how the money could be moved to an IRA without the participants signature?

Thank you all for your input.

[masteff]

Also, I don't see how the money could be moved to an IRA without the participants signature?

You need to cross reference to: de minimis cashout and automatic rollover

You might have to amend the plan to restore the cashout limit if it was reduced several years ago when the automatic rollover rule was enacted.

[mbozek]

I'm not sure what you mean by "plan has an annuity option." Do you mean at NRA the participant can elect a life annuity, or J&S, or 10 year certain annuty? If so, then, yes, the plan does have an annuity option. Also, I don't see how the money could be moved to an IRA without the participants signature?

Thank you all for your input.

The language about plan having an annuity option is taken from the IRS regs. There is no futher explaination. However it is highly unlikely that an annuity can be purchased with only $2,000. It would be cheaper to offer the participant a bonus payment to take his distribution than to continue maintaining the plan for several years and pay the admin costs.

[RayJJohnsonJr]

I would like to thank everyone for their input. Thanks to your help, we found the authority in the document to Cash him out, so that's what we did.

Thanks again all,

Rene

[kwalified]

This is an answer from rocknrols2 on an earlier thread on the same topic and I'm pretty sure it's still accurate.

"If it a profit-sharing plan without a 401(k) feature, there is an exception to the consent requirement provided that (1) the terminating plan does not offer an annuity option and (2) the plan sponsor orr any other controlled group member does not maintain any other DC plan other than an ESOP. If the answer to both of these is no, then the plan may simply cash out the participant without regard to the amount of his/her account balance. If (2) is yes, the terminating plan may simply transfer the participant's account balance to the other DC plan without the partiicpant's consent. See Reg. Section 1.411(a)-11(e)(1). If (1) is yes, then you could purchase an annuity for the participant and distribute it to him/her.

If the plan is a money purchase plan, there is no similar exception to the cash-out rule. In that case, the only option may be to purchase an annuity for the participant and distribute it to him or her.

If the plan is a 401(k) plan, the rules are pretty much the same as in the case of a profit-sharing plan, but it is important to bear in mind the distribution restrictions on termination of a 401(k) plan. These are that there is no other DC plan is maintained by the plan sponsor or any other entity which is related to the plan sponsor within the meaning of Section 414(b), ©, (m) or (o) at any time during the period beginning 12 months before the date of the plan's termination and ending 12 months after the plan's termination. The following are not considered DC plans for purposes of the special 401(k) distribution restriction on plan termination: an ESOP, a SEP, a SIMPLE IRA, or a 403(b) or 457(b) or (f) plan. "

What if the sponsor maintains a terminating 401(k) and a FROZEN MPPP?

[mbozek]

This is an answer from rocknrols2 on an earlier thread on the same topic and I'm pretty sure it's still accurate.

"If it a profit-sharing plan without a 401(k) feature, there is an exception to the consent requirement provided that (1) the terminating plan does not offer an annuity option and (2) the plan sponsor orr any other controlled group member does not maintain any other DC plan other than an ESOP. If the answer to both of these is no, then the plan may simply cash out the participant without regard to the amount of his/her account balance. If (2) is yes, the terminating plan may simply transfer the participant's account balance to the other DC plan without the partiicpant's consent. See Reg. Section 1.411(a)-11(e)(1). If (1) is yes, then you could purchase an annuity for the participant and distribute it to him/her.

If the plan is a money purchase plan, there is no similar exception to the cash-out rule. In that case, the only option may be to purchase an annuity for the participant and distribute it to him or her.

If the plan is a 401(k) plan, the rules are pretty much the same as in the case of a profit-sharing plan, but it is important to bear in mind the distribution restrictions on termination of a 401(k) plan. These are that there is no other DC plan is maintained by the plan sponsor or any other entity which is related to the plan sponsor within the meaning of Section 414(b), ©, (m) or (o) at any time during the period beginning 12 months before the date of the plan's termination and ending 12 months after the plan's termination. The following are not considered DC plans for purposes of the special 401(k) distribution restriction on plan termination: an ESOP, a SEP, a SIMPLE IRA, or a 403(b) or 457(b) or (f) plan. "

What if the sponsor maintains a terminating 401(k) and a FROZEN MPPP?

The 401k plan benefits can be transferred to the MPPP as long as the option to take the 401k benefits in a lump sum is preserved. Reg. 1.411(d)-4 Q-2(a)(3).