Rollover account in mandatory cashouts

[BG5150]

My document provider is telling me that if the plan has a $1,000 threshold for mandatory cashouts, I must include the participant's rollover account in the determination.

I was under the assumption that if after calculating the balance to be under the threshold (be it $5,000 or $1,000), any mandatory cashout (or auto-rollover) would include the participant's rollover account.

they referred me to Notice 2005-05 which deals with auto rollovers.

I don't see anything in there that would contradict my thoughts on the matter.

Any other insight?

[Belgarath]

I remember this was a source of much confusion, but I don't recall the clarifying guidance, or the roundabout interpretation if that's what it ultimately turned out to be. It has been established now for long enough that the history of it is beyond my feeble recall. The attached may help - see paragraph 3. But I couldn't, offhand, point you to the official guidance that states what the IRS is saying here. At any rate, I think your document provider is correct.

http://www.irs.gov/pub/irs-tege/epnf_021605.pdf

[masteff]

Both items (disregarding rollovers for determination of cashout and automatic rollovers) resulted from EGTRRA. http://www.irs.gov/pub/irs-utl/egtrra_law.pdf

Section 648 of EGTRRA adds paragraph D to Code Section 411(a)(11). Paragraph D says in part "the present value of the nonforfeitable accrued benefit is determined without regard to that portion of such benefit which is attributable to rollover contributions (and earnings allocable thereto)".

Section 657 of EGTRRA inserts a new paragraph B into Code Section 401(a)(31) to address automatic rollovers. This paragraph does crossreference Section 411(a)(11) but only in reference to how the plan determines present value w/ respect to the $5,000 cashout limit.

The way that I read the Code changes as well as Q&A-14 of Notice 2005-05, my conclusion is you exclude the rollover for determining the top end (ie the $5,000), but nothing suggests that you use it for the bottom end (ie the $1,000). This is because the top end comes from a different Code section than the bottom end.

That, and it's kinda hard to argue w/ the newsletter that Belgarath linked.