Penatly(?) for not cashing out low balances

[BG5150]

Is there a penalty when a plan administrator does not cash-out the low balance accounts timely? (Assuming the plan document calls for it)

Obviously, it is a failure to follow the plan document. But has either service assessed penalties when the PA doesn't keep up with it? Or is it just "get it done" when it's discovered?

[QDROphile]

No empirical experience. I think what the IRS would do depends on the circumstances and the auditor. As you have observed, the IRS could assert disqualification

[ESOP Guy]

Does the plan document really require cash out? I have seen plenty that give the administrator the option but require seems rarer.

[My 2 cents]

Defined benefit plans often contain provisions saying that benefits worth less than $5,000 "shall" be cashed out. Remember - the sponsor cannot be permitted any discretion for such things! As Yoda should have said, "Do. Or do not. There is no maybe."

[KJohnson]

I agree with My 2 cents (and Yoda). Look at the highlighted language below from the 1.411(d)-4.

I have included the failure to cash out as an item in a VCP previously with several other issues. It is not mentioned specifically in EPCRS and the correction, which was accepted, was to just go ahead and cash out everyone in a single year.

Q-4: May a plan provide that the employer may, through the exercise of discretion, deny a participant a section 411(d)(6) protected benefit for which the participant is otherwise eligible?

A-4: (a) In general. Except as provided in paragraph (d) of Q&A-2 of this section with respect to certain employee stock ownership plans, a plan that permits the employer, either directly or indirectly, through the exercise of discretion, to deny a participant a section 411(d)(6) protected benefit provided under the plan for which the participant is otherwise eligible (but for the employer's exercise of discretion) violates the requirements of section 411(d)(6). A plan provision that makes a section 411(d)(6) protected benefit available only to those employees as the employer may designate is within the scope of this prohibition. Thus, for example, a plan provision under which only employees who are designated by the employer are eligible to receive a subsidized early retirement benefit constitutes an impermissible provision under section 411(d)(6). In addition, a pension plan that permits employer discretion to deny the availability of a section 411(d)(6) protected benefit violates the definitely determinable requirement of section 401(a), including section 401(a)(25). See § 1.401-1(b)(1)(i). This is the result even if the plan specifically limits the employer's discretion to choosing among section 411(d)(6) protected benefits, including optional forms of benefit, that are actuarially equivalent. In addition, the provisions of sections 411(a)(11) and 417(e) that allow a plan to make involuntary distributions of certain amounts are not excepted from this limitation on employer discretion. Thus, for example, a plan may not permit employer discretion with respect to whether benefits will be distributed involuntarily in the event that the present value of the employee's benefit is not more than the cash-out limit in effect under § 1.411(a)-11©(3)(ii) within the meaning of sections 411(a)(11) and 417(e). (An exception is provided for such provisions with respect to the nondiscrimination requirements of section 401(a)(4). See § 1.401(a)(4)-4(b)(2)(ii)©.)

[MoJo]

It's now on the DOL "audit list" to check to see if cash-outs have been processed and processed consistently. I've had client's DOL auditors question that a number of times in the last year or so.

Also apparently on their list: uncashed checks. The DOL expects the same sort of "reasonable" search for those former employees as for "lost" participants - and some expect the uncashed checks to be redeposited into the plan's trust account. I've talked to several auditors (accounting firms) who all say they believe uncashed checks remain "plan assets" but they have yet to account for them in the audit (or to count the former employee as a participant until the check is cashed).