Forced Distribution Options

[Guest Jules1]

I understand that my plan, I'm a trustee, can "force" distributions for terminated participants that have under $5,000. It is my understanding that if they have less than $1,000 the only option I may have is to put them into an IRA with a Guaranteed Fund. What are my requirements for those with more than $1,000 but less than $5,000. I'm in the process of developing mailings to a handful of people that fall into both categories. Does anyone know of any providers that could set up the accounts for those under $1,000.

[masteff]

You have it backward. Automatic rollover applies to $1000 - $5000. http://www.irs.gov/pub/irs-drop/n-05-05.pdf

[Guest Jules1]

Masteff - Thanks for the material. Are you saying that for those terminated participants that have accounts less than $1,000 that my responsibilities are only to send them cash? I was under the impression that I had to put them into a guaranteed account IRA.

[masteff]

The other factor you have to consider is what your plan document says. You plan may very well say that.

[QDROphile]

You have to follow their instructions for distribution. The discussion so far has presumed that the plan has not been given instructions after the plan has delivered the appropriate disclosure.

[david rigby]

Don't forget that you might wear several hats. If the plan does not have the payout language you anticipate, an amendment may be possible. However, it is not usually the Trustee who executes an amendment.

[GMK]

Contact the plan administrator for a copy of the plan document (not the summary plan description, which may not provide enough details).

Read the plan document to find out if your plan requires a cash out distribution for balances less than $5000 or only for those less than $1000. Some plans set the cash out limit at up to $1000, so they don't have to do the IRA thing.

Offer all the forced out participants the option to take the distribution in cash or in a direct rollover (assuming the distribution is rollover eligible).

You then only have to force out the participants who do not respond. Under $1000, you can send them cash. Over $1000, you put it in an IRA for them.

You will probably have to call around to find out where you can get an IRA with a small initial deposit amount. One option may be a bank that offers 401(k) services. Good luck.

[BG5150]

Side note: Some plan document options let you disregard rollover accounts when determining if a cashout/auto-rollover is called for.

For example, John Q Publick may have a vested account balance of $12,500. No force out allowed. or is it? Say $9,000 of that is a rollover from his former 401(k) plan, with the remainder of the account worth $3,500. You can and should make the distribution if the plan does not consider rollovers with regards to cashout.

[ESOP Guy]

At risk of pointing out the obvious but if you force someone out and it is NOT to an IRA and the amount is greater then $200 you have to withhold taxes also.

[SheilaD]

I know of at least 2 companies that will take small rollovers. It didn't feel right to do their advertising for them -- but feel free to send me an email and I will send you their information.

sdott@northeastprofessional.com

[cdavis25]

One other note, be careful you don't have any lost participants. You will need to try and locate them before forcing them out.