$5,000 small cashout threshold

[dmb]

Does the $5,000 small lump sum cashout threshold apply only to the value of employer provided benefit? How does employee contribution money play into the $5,000 cashout threshold? Thank you.

[GMK]

I'm used to seeing it as the vested account balance, although that may or may not include rollover contributions (see what the Adoption Agreement specifies). This should all be spelled out in the Plan Doc and Adoption Agreement.

[My 2 cents]

I'm pretty sure it is, no ifs ands or buts, total benefits, including employee-paid benefits. This means that if the total benefit is worth more than $5,000, you cannot refund employee contributions without spousal consent (noting that this is a DB plan, based on the forum). I am also pretty sure that if the plan is restricted under IRC Section 436, exemption from the restriction on lump sums only applies when the total (employer plus employee) is worth less than $5,000.

[dmb]

Thanks for the response, that was our thought as well. However, I refer to gray book question 2003-28 and ask if this changes your thinking:

A participant in a contributory plan terminates and is eligible to withdraw contributions and interest of $3,000 immediately. The present value of the participant's total benefit (including contributions and interest is $7,000 (i.e., over $5,000). The plan does not have a large amount lump sum option. The participant withdraws the contributions and interest, with consent of the participant's spouse. The remaining present value is then $4,000. Can an involuntary cashout of $4,000 be made on the same day the participant withdraws the employee contributions or must the distributions occur in a two-step process in order to meet 1.411(a)-11©(3)?

RESPONSE

The distributions can occur on the same day. The consent of the spouse is not needed for the “subsequent” lump sum benefit payable that is under the $5,000 threshold.

[My 2 cents]

I am pretty sure that things don't work that way when the plan is limited by Section 436. Example: Participant's total benefit is worth $8,000 and the plan (normally) allows lump sums at termination of employment. According to my recollection of the Section 436 regulations, the participant can now take a lump sum of $4,000 (50% of the total benefit, assuming AFTAP between 60% and 79%) but must either defer commencement of the remainder or take the remainder as a non-decreasing benefit payable for at least the participant's lifetime (notwithstanding the remainder being worth less than $5,000).

I cannot recall whether the IRS has issued anything contrary to that gray book question since 2003 taking a different position (or affirming it) when Section 436 is not affecting distributions. Perhaps that sort of thing is one of the reasons that the IRS has sworn off participating in the gray book process.

[dmb]

Thanks again. Agreed on the 436 issue, but there are no restrictions in play here. Thanks again, and yes, maybe that's why no more of the appropriately titled grey book.